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Post by Sapphire Capital on Sept 29, 2012 3:24:21 GMT 4
A Model of Shadow Banking Nicola Gennaioli Centro di Ricerca sull'Economia delle Istituzioni (CREI) (Research Center on Economics of Institutions) Andrei Shleifer Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI) Robert W. Vishny University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER) April 16, 2012 Chicago Booth Research Paper No. 12-38 Fama-Miller Working Paper 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 ignore tail risks. Attachments:
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