In the Shadow of Shadow Banking: A Liquidity Perspective

53 Pages Posted: 18 Sep 2018 Last revised: 19 May 2024

See all articles by Zehao Liu

Zehao Liu

Renmin University of China - School of Finance

Ping He

Tsinghua University, SEM

Chengbo Xie

School of Finance, SWUFE

Date Written: May 15, 2024

Abstract

Liquidity requirements for commercial banks improve risk-sharing for depositors. Nevertheless, shadow banks, issuing securities with lower liquidity, operate outside such regulatory constraints. In an economy featuring shadow banks and a fixed level of liquidity for shadow bank securities, higher liquidity requirements lead to a reduction in aggregate liquidity provision, owing to regulatory arbitrage incentives. Conversely, when the liquidity of shadow bank securities is endogenous, higher liquidity requirements could enhance aggregate liquidity provision, because the liquidity of shadow bank securities decreases with the market share of shadow banks, thus mitigating the incentive for regulatory arbitrage.

Keywords: Shadow Banking, Liquidity Requirements, Regulatory Arbitrage, Liquidity Shortage, Search and Matching

JEL Classification: E40, E50, G20

Suggested Citation

Liu, Zehao and He, Ping and Xie, Chengbo, In the Shadow of Shadow Banking: A Liquidity Perspective (May 15, 2024). Available at SSRN: https://ssrn.com/abstract=3243447 or http://dx.doi.org/10.2139/ssrn.3243447

Zehao Liu (Contact Author)

Renmin University of China - School of Finance ( email )

Ming De Main Building
Renmin University of China
Beijing, Beijing 100872
China

HOME PAGE: http://sites.google.com/view/zehaoliu/home

Ping He

Tsinghua University, SEM ( email )

Beijing, 100084
China
8610-62795754 (Phone)
8610-62784554 (Fax)

HOME PAGE: http://www.sem.tsinghua.edu.cn/en/heping

Chengbo Xie

School of Finance, SWUFE ( email )

Gezhi Building, SWUFE
518
Chengdu, Sichuan
China

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