Sustainable Shadow Banking
Commercial banks are subject to regulation that restricts their investments. When banks are concerned for their reputation, however, they could self-regulate and invest more efficiently. Hence, a shadow banking that arises to avoid regulation has the potential to improve welfare. Still, reputation concerns depend on future economic prospects and may suddenly disappear, generating a collapse of shadow banking and a return to traditional banking, with a decline in welfare. I discuss how a combination of traditional regulation and cross reputation subsidization may enhance shadow banking and make it more sustainable.
|Date of creation:||May 2013|
|Date of revision:|
|Note:||EFG LE ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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