A shadow unregulated banking system flourished during the first decade of the century and suddenly collapsed in less than a year. It is widely accepted this shadow system was based on confidence, but it is not clear how confidence can spur so much and then disappear so fast. In this paper I argue confidence is sustained by the recognition that financial agents care about reputation. While reputation incentives generate an alternative cheaper than traditional banking to provide financing needs, it is also a fragile alternative, that may suddenly collapse. This implies financial regulation should be counter-cyclical, but not imposing more costs to traditional banking during good times but inducing more benefits to better firms during bad times.
|Date of creation:||2010|
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|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
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- Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, December.
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