Welfare-Based Optimal Macroprudential Policy with Shadow Banks

95 Pages Posted: 24 Jun 2021

Date Written: June 2021

Abstract

In this paper, I show that the existence of non-bank financial institutions (NBFIs) has implications for the optimal regulation of the traditional banking sector. I develop a New Keynesian DSGE model for the euro area featuring a heterogeneous financial sector allowing for potential credit leakage towards unregulated NBFIs. Introducing NBFIs raises the importance of credit stabilization relative to other policy objectives in the welfare-based loss function of the regulator. The resulting optimal policy rule indicates that regulators adjust dynamic capital requirements more strongly in response to macroeconomic shocks due to credit leakage. Furthermore, introducing non-bank finance not only alters the cyclicality of optimal regulation, but also has implications for the optimal steady-state level of capital requirements and loan-to-value ratios. Sector-specific characteristics such as bank market power and risk affect welfare gains from traditional and NBFI credit.

Keywords: [comma sepaMacroprudential Regulation, Monetary Policy, Optimal Policy, Non-Bank Finance, Shadow Banking, Financial Frictionsrated]

JEL Classification: E44, E61, G18, G23, G28

Suggested Citation

Gebauer, Stefan, Welfare-Based Optimal Macroprudential Policy with Shadow Banks (June 2021). Banque de France Working Paper No. 817, Available at SSRN: https://ssrn.com/abstract=3868955 or http://dx.doi.org/10.2139/ssrn.3868955

Stefan Gebauer (Contact Author)

Banque de France ( email )

Paris
France

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