Publication: A Model of Shadow Banking
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Date
2013
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Wiley Blackwell (Blackwell Publishing)
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Gennaioli, Nicola, Andrei Shleifer, And Robert W. Vishny. 2013. “A Model of Shadow Banking.” The Journal of Finance 68 (4) (August 16): 1331-1363. doi:10.1111/jofi.12031. http://dx.doi.org/10.1111/jofi.12031.
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Abstract
We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors ignore tail risks.
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