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A Model of Shadow Banking

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  • Nicola Gennaioli
  • Andrei Shleifer
  • Robert W. Vishny

Abstract

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 neglect tail risks.

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  • Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, "undated". "A Model of Shadow Banking," Working Paper 19521, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:19521
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    File URL: http://scholar.harvard.edu/shleifer/node/19521
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    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services

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