IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Shadow banks and systemic risks

Listed author(s):
  • Gong, Rui
  • Page, Frank

We answer the following question: Does regulating the banking network increase systemic risk in the entire financial network in the presence of unregulated shadow banks? In order to answer this question, we introduce a formal definition of systemic risk based on the equilibrium state dynamics generated by a stochastic game of network formation with banks and shadow banks. Based on the equilibrium dynamics, we discuss the properties of equilibrium financial networks. The predictions of the model are consistent with empirical evidence in the literature. Our analysis makes clear the systemic importance of connections between commercial banks and shadow banks in determining the health of the entire financial network. Lastly, but most importantly, we give a definition of systemic risk based on equilibrium dynamics, and therefore, a definition which takes into account the strategic interactions of financial institutions when facing different regulatory policies. Given our definition of systemic risk, we discuss various policies for regulating the financial system. Then, specializing our dynamic stochastic game model to a more basic model in which banks and shadow banks form a network including connections to the real economy, we show, via numerical simulations of our stochastic game model under various regulatory regimes, that imposing bank regulations not faced by shadow banks does indeed increase systemic risk throughout the financial network.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://eprints.lse.ac.uk/66044/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 66044.

as
in new window

Length: 58 pages
Date of creation: 15 Feb 2016
Handle: RePEc:ehl:lserod:66044
Contact details of provider: Postal:
LSE Library Portugal Street London, WC2A 2HD, U.K.

Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2013. "A Model of Shadow Banking," Journal of Finance, American Finance Association, vol. 68(4), pages 1331-1363, August.
  2. Tobias Adrian & Adam B. Ashcraft, 2012. "shadow banking: a review of the literature," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  3. Page, Frank Jr. & Wooders, Myrna H. & Kamat, Samir, 2005. "Networks and farsighted stability," Journal of Economic Theory, Elsevier, vol. 120(2), pages 257-269, February.
  4. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
  5. Jackson, Matthew O. & van den Nouweland, Anne, 2005. "Strongly stable networks," Games and Economic Behavior, Elsevier, vol. 51(2), pages 420-444, May.
  6. Tobias Adrian & Adam B. Ashcraft, 2012. "Shadow Banking Regulation," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 99-140, October.
  7. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  8. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
  9. Matthew Elliott & Benjamin Golub & Matthew O. Jackson, 2014. "Financial Networks and Contagion," American Economic Review, American Economic Association, vol. 104(10), pages 3115-3153, October.
  10. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  11. Ghosh, Swati & Gonzalez del Mazo, Ines & İnci Ötker-Robe, 2012. "Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets?," World Bank - Economic Premise, The World Bank, issue 88, pages 1-7, September.
  12. Canova, Fabio, 1994. "Were Financial Crises Predictable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 102-124, February.
  13. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
  14. Swati Ghosh & Ines Gonzalez del Mazo & ?nci Ötker-Robe, 2012. "Chasing the Shadows : How Significant is Shadow Banking in Emerging Markets?," World Bank Other Operational Studies 17088, The World Bank.
  15. Joshua D. Coval & Jakub W. Jurek & Erik Stafford, 2009. "Economic Catastrophe Bonds," American Economic Review, American Economic Association, vol. 99(3), pages 628-666, June.
  16. Allen, Linda & Saunders, Anthony, 1986. "The large-small bank dichotomy in the federal funds market," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 219-230, June.
  17. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  18. Kenny, Geoff & Morgan, Julian, 2011. "Some lessons from the financial crisis for the economic analysis," Occasional Paper Series 130, European Central Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:66044. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.