Why do Traditional and Shadow Banks Coexist?

Fisher College of Business Working Paper No. 2019-03-011

Charles A. Dice Working Paper No. 2019-11

82 Pages Posted: 24 Apr 2019 Last revised: 21 Feb 2023

See all articles by Victor Lyonnet

Victor Lyonnet

Ohio State University (OSU)

Edouard Chretien

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Date Written: February 14, 2023

Abstract

This paper shows that traditional and shadow banks interacted in similar ways in the 2007 and COVID-19 crises, when both assets and liabilities flew out of shadow banks and into traditional banks. We explain this finding in a model of the coexistence of traditional and shadow banks in which liabilities and assets flow from the former to the latter in good times to avoid regulation, and the other way in a crisis to alleviate fire sales. The model sheds light on the (unintended) consequences of regulations for traditional banks on the shadow banking sector.

Keywords: Traditional banks, Shadow banks, Financial crisis, Deposit insurance

JEL Classification: G01, G21, G23, G38

Suggested Citation

Lyonnet, Victor and Chretien, Edouard, Why do Traditional and Shadow Banks Coexist? (February 14, 2023). Fisher College of Business Working Paper No. 2019-03-011, Charles A. Dice Working Paper No. 2019-11, Available at SSRN: https://ssrn.com/abstract=3376891 or http://dx.doi.org/10.2139/ssrn.3376891

Victor Lyonnet (Contact Author)

Ohio State University (OSU) ( email )

Columbus, OH 43210
United States

Edouard Chretien

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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