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A Model of Shadow Banking

  • Gennaioli, Nicola
  • Shleifer, Andrei
  • Vishny, Robert W.

We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors ignore tail risks.

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File URL: http://dash.harvard.edu/bitstream/handle/1/11688792/87077864.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 11688792.

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Date of creation: 2013
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Publication status: Published in The Journal of Finance
Handle: RePEc:hrv:faseco:11688792
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