A Model of Shadow Banking

66 Pages Posted: 21 Aug 2012

See all articles by Nicola Gennaioli

Nicola Gennaioli

Bocconi University - Department of Finance

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)

Multiple version iconThere are 3 versions of this paper

Date Written: April 16, 2012

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.

Suggested Citation

Gennaioli, Nicola and Shleifer, Andrei and Vishny, Robert W., A Model of Shadow Banking (April 16, 2012). Chicago Booth Research Paper No. 12-38, Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=2133418 or http://dx.doi.org/10.2139/ssrn.2133418

Nicola Gennaioli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Andrei Shleifer

Harvard University - Department of Economics ( email )

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HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Robert W. Vishny (Contact Author)

University of Chicago - Booth School of Business ( email )

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312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

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United States

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