Why do Traditional and Shadow Banks Coexist?

86 Pages Posted: 24 Apr 2019 Last revised: 11 Jan 2025

See all articles by Victor Lyonnet

Victor Lyonnet

University of Michigan at Ann Arbor - Finance

Edouard Chretien

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

Date Written: January 11, 2025

Abstract

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 these facts 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? (January 11, 2025). Fisher College of Business Working Paper No. 2019-03-011, Available at SSRN: https://ssrn.com/abstract=3376891 or http://dx.doi.org/10.2139/ssrn.3376891

Victor Lyonnet (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

HOME PAGE: http://www.victorlyonnet.com

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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