IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc15/113204.html
   My bibliography  Save this paper

Banks, Shadow Banking, and Fragility

Author

Listed:
  • Luck, Stephan
  • Schempp, Paul

Abstract

We study a banking model in which regulatory arbitrage induces the existence of shadow banking next to regulated banks. We show that the size of the shadow banking sector determines its stability. Panic-based runs become possible only if this sector is large. Moreover, if regulated banks conduct shadow banking, a relatively larger shadow banking sector is sustainable. However, crises become contagious and spread to the regulated banking sector. We argue that deposit insurance may fail to eliminate adverse run equilibria in the presence of regulatory arbitrage. It may become tested in equilibrium if regulated banking and shadow banking are intertwined.

Suggested Citation

  • Luck, Stephan & Schempp, Paul, 2015. "Banks, Shadow Banking, and Fragility," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113204, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113204
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/113204/1/VfS_2015_pid_210.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Stefan Nagel & Dmitry Orlov, 2014. "Sizing Up Repo," Journal of Finance, American Finance Association, vol. 69(6), pages 2381-2417, December.
    2. 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.
    3. Anatoli Segura, 2014. "Why did Sponsor Banks Rescue their SIVs? A Signaling Model of Rescues," Working Papers wp2014_1402, CEMFI.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    5. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    6. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    7. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
    8. Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011. "Outside and Inside Liquidity," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 259-321.
    9. Gorton, Gary B., 2012. "Misunderstanding Financial Crises: Why We Don't See Them Coming," OUP Catalogue, Oxford University Press, number 9780199922901.
    10. Stijn Claessens & Lev Ratnovski & Manmohan Singh, 2012. "Shadow Banking; Economics and Policy," IMF Staff Discussion Notes 12/12, International Monetary Fund.
    11. Schmidt, Lawrence & Timmermann, Allan G & Wermers, Russ, 2014. "Runs on Money Market Funds," CEPR Discussion Papers 9906, C.E.P.R. Discussion Papers.
    12. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    13. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    14. Acharya, Viral V. & Schnabl, Philipp & Suarez, Gustavo, 2013. "Securitization without risk transfer," Journal of Financial Economics, Elsevier, vol. 107(3), pages 515-536.
    15. von Thadden, Ernst-Ludwig, 1998. "Intermediated versus Direct Investment: Optimal Liquidity Provision and Dynamic Incentive Compatibility," Journal of Financial Intermediation, Elsevier, vol. 7(2), pages 177-197, April.
    16. Charles A.E. Goodhart & Anil K. Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2012. "Financial Regulation in General Equilibrium," NBER Working Papers 17909, National Bureau of Economic Research, Inc.
    17. Lawrence Schmidt & Allan Timmermann & Russ Wermers, 2016. "Runs on Money Market Mutual Funds," American Economic Review, American Economic Association, vol. 106(9), pages 2625-2657, September.
    18. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    19. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    20. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    21. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
    22. Guillermo Ordoñez, 2018. "Sustainable Shadow Banking," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 33-56, January.
    23. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    24. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    25. Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
    26. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
    27. Charles A. E. Goodhart & Anil K Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2013. "An Integrated Framework for Analyzing Multiple Financial Regulations," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 109-144, January.
    28. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    29. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Duca, John V. & Ling, David C., 2020. "The other (commercial) real estate boom and bust: The effects of risk premia and regulatory capital arbitrage," Journal of Banking & Finance, Elsevier, vol. 112(C).
    2. Voellmy, Lukas, 2017. "Shadow Banking and Financial Stability under Limited Deposit Insurance," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168262, Verein für Socialpolitik / German Economic Association.
    3. Suarez, Javier & Sánchez Serrano, Antonio, 2018. "Approaching non-performing loans from a macroprudential angle," Report of the Advisory Scientific Committee 7, European Systemic Risk Board.
    4. Stephen F. LeRoy & Rish Singhania, 2020. "Deposit insurance and the coexistence of commercial and shadow banks," Annals of Finance, Springer, vol. 16(2), pages 159-194, June.
    5. Kraemer-Eis, Helmut & Battazzi, Francesco & Charrier, Remi & Natoli, Marco & Squilloni, Matteo, 2014. "Institutional non bank lending and the role of debt funds," EIF Working Paper Series 2014/25, European Investment Fund (EIF).
    6. E. Chrétien & V. Lyonnet, 2017. "Traditional and Shadow Banks during the Crisis," Débats économiques et financiers 27, Banque de France.
    7. Funke, Michael & Mihaylovski, Petar & Zhu, Haibin, 2015. "Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control," BOFIT Discussion Papers 9/2015, Bank of Finland, Institute for Economies in Transition.
    8. Konstantin Kosenko & Noam Michelson, 2018. "It Takes More than Two to Tango: Understanding the Dynamics behind Multiple Bank Lending and its Implications," Bank of Israel Working Papers 2018.11, Bank of Israel.
    9. Antonio Bianco, 2015. "Shadow banking, relationship banking, and the economics of depression," PSL Quarterly Review, Economia civile, vol. 68(275), pages 297-326.
    10. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.
    11. Michael Funke & Petar Mihaylovski & Haibin Zhu, "undated". "Monetary policy transmission in China: A DSGE model with parallel shadow banking and interest rate control," GRU Working Paper Series GRU_2016_007, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    12. Duca, John V., 2016. "How capital regulation and other factors drive the role of shadow banking in funding short-term business credit," Journal of Banking & Finance, Elsevier, vol. 69(S1), pages 10-24.
    13. Tobias Adrian & Edouard Chrétien & Michael Chui & Saskia de Vries-van Ewijk & Christoph Fricke & Daniel Fricke & Seppo Honkapohja & Jiasun Li & Victor Lyonnet & Stan Maes & Patrizio Morganti & Daniéle, 2018. "Shadow Banking: Financial Intermediation beyond Banks," SUERF Studies, SUERF - The European Money and Finance Forum, number 2018/1 edited by Esa Jokivuolle, November.
    14. Aizenman, Joshua & Binici, Mahir, 2016. "Exchange market pressure in OECD and emerging economies: Domestic vs. external factors and capital flows in the old and new normal," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 65-87.
    15. Bianco, Antonio, 2015. "Relationship Banking, Shadow Banking, and the Economics of Depression," MPRA Paper 65849, University Library of Munich, Germany.
    16. Stephanie Chan & Sweder van Wijnbergen, 2014. "Cocos, Contagion and Systemic Risk," Tinbergen Institute Discussion Papers 14-110/VI/DSF79, Tinbergen Institute, revised 29 Oct 2014.
    17. Flore, Raphael, 2015. "Causes of Shadow Banking - Two Regimes of Credit Risk Transformation and its Regulation," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113178, Verein für Socialpolitik / German Economic Association.
    18. Poeschl, Johannes & Zhang, Xue, 2018. "Bank Capital Regulation and Endogenous Shadow Banking Crises," MPRA Paper 92529, University Library of Munich, Germany.
    19. R. Matthew Darst & Ehraz Refayet & Alexandros Vardoulakis, 2020. "Banks, Non Banks, and Lending Standards," Finance and Economics Discussion Series 2020-086, Board of Governors of the Federal Reserve System (U.S.).
    20. Poeschl, Johannes & Zhang, Xue, 2019. "Bank Capital Regulation and Endogenous Shadow Banking Crises," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203520, Verein für Socialpolitik / German Economic Association.
    21. George Pennacchi, 2019. "Banks, Taxes, and Nonbank Competition," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 1-30, February.
    22. Huang, Ji, 2018. "Banking and shadow banking," Journal of Economic Theory, Elsevier, vol. 178(C), pages 124-152.
    23. Angus Armstrong & Tatiana Fic, 2014. "Bank Diversification and Valuation: International Evidence," National Institute of Economic and Social Research (NIESR) Discussion Papers 438, National Institute of Economic and Social Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.),Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    2. Daniel Covitz & Nellie Liang & Tobias Adrian, 2015. "Financial Stability Monitoring," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 357-395, December.
    3. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, 12-2019.
    4. E. Chrétien & V. Lyonnet, 2017. "Traditional and Shadow Banks during the Crisis," Débats économiques et financiers 27, Banque de France.
    5. DeAngelo, Harry & Stulz, René M., 2015. "Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks," Journal of Financial Economics, Elsevier, vol. 116(2), pages 219-236.
    6. Antoine Martin & David Skeie & Ernst-Ludwig von Thadden, 2014. "Repo Runs," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 957-989.
    7. 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.
    8. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.),Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.
    9. Shleifer, Andrei & Vishny, Robert W., 2010. "Unstable banking," Journal of Financial Economics, Elsevier, vol. 97(3), pages 306-318, September.
    10. Sebastian Infante, 2013. "Repo collateral fire sales: the effects of exemption from automatic stay," Finance and Economics Discussion Series 2013-83, Board of Governors of the Federal Reserve System (U.S.).
    11. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    12. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
    13. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    14. Martin, Antoine & Skeie, David & von Thadden, Ernst-Ludwig, 2014. "The fragility of short-term secured funding markets," Journal of Economic Theory, Elsevier, vol. 149(C), pages 15-42.
    15. Financial Stability Committee, Task Force on cross-border Spillover Effects of macroprudential measures & Kok, Christoffer & Reinhardt, Dennis, 2020. "Cross-border spillover effects of macroprudential policies: a conceptual framework," Occasional Paper Series 242, European Central Bank.
    16. Majid Haghani Rizi & N. Kundan Kishor & Hardik A. Marfatia, 2019. "The dynamic relationship among the money market mutual funds, the commercial paper market, and the repo market," The European Journal of Finance, Taylor & Francis Journals, vol. 25(5), pages 395-414, March.
    17. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, May.
    18. Roland Meeks & Benjamin Nelson & Piergiorgio Alessandri, 2017. "Shadow Banks and Macroeconomic Instability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1483-1516, October.
    19. Ippolito, Filippo & Peydró, José-Luis & Polo, Andrea & Sette, Enrico, 2016. "Double bank runs and liquidity risk management," ESRB Working Paper Series 8, European Systemic Risk Board.
    20. Abbassi, Puriya & Iyer, Rajkamal & Peydró, José-Luis & Tous, Francesc R., 2016. "Securities trading by banks and credit supply: Micro-evidence from the crisis," ESRB Working Paper Series 5, European Systemic Risk Board.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc15:113204. 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: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: http://edirc.repec.org/data/vfsocea.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.