Are Traditional and Shadow Banks Symbiotic?

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

Charles A. Dice Working Paper No. 2019-11

49 Pages Posted: 24 Apr 2019 Last revised: 22 Mar 2021

See all articles by Edouard Chretien

Edouard Chretien

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

Victor Lyonnet

Ohio State University (OSU)

Date Written: March 20, 2021

Abstract

This paper shows that traditional and shadow banks interacted in similar ways in the 2007 and 2020 financial crises, when both assets and liabilities flew from shadow to traditional banks. We explain this finding by modeling the symbiotic relationship between traditional and shadow banks. Traditional banks are subject to costly regulation in exchange for deposit insurance, while shadow banks avoid regulation but cannot rely on deposit insurance. During crises, shadow banks repay their creditors by selling assets at fire sale prices which are purchased by traditional banks using deposit insurance. Regulations for traditional banks have (unintended) effects on shadow banks.

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

JEL Classification: G01, G21, G23, G38

Suggested Citation

Chretien, Edouard and Lyonnet, Victor, Are Traditional and Shadow Banks Symbiotic? (March 20, 2021). 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

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

Victor Lyonnet (Contact Author)

Ohio State University (OSU) ( email )

Columbus, OH 43210
United States

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