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Victor LYONNET (HEC) – “Traditional and Shadow Banks”

October 16, 2017, 12:15 pm - 1:30 pm

The Macroeconomics Seminar: Every Monday at 12:15 pm.

Time: 12:15 pm – 1:30 pm
Date: 16th of October 2017
Place: Room 3001.

Victor LYONNET  (HEC) – “Traditional and Shadow Banks”


We propose a theory of the coexistence of traditional and shadow banks. In our model, bankers must choose to set up a traditional or a shadow bank: Shadow banks escape the costly regulation traditional banks must comply with, but forgo deposit insurance, which traditional banks can rely upon in a crisis. Thus, in a crisis, shadow banks repay their creditors by selling assets at fire-sale prices to traditional banks, which fund these purchases with insured deposits. The larger the relative size of the traditional banking sector, the higher these asset prices, and thus the higher a banker’s incentive to set up a shadow bank in the first place. We show that in equilibrium traditional and shadow banks coexist. The analysis implies that an increase in deposit insurance leads to a decrease in the relative size of the traditional banking sector, and that in equilibrium, the shadow banking sector is larger than socially optimal. Our model is consistent with several facts from the 2007 financial crisis: some assets and (deposit-like) liabilities migrated from shadow banks to traditional banks, and shadow bank assets were sold to traditional banks at fire sale prices.


Julien PRAT (CREST )


Address : ENSAE ParisTech  5, avenue Henry Le Chatelier 91120 Palaiseau, How to come?



October 16, 2017
12:15 pm - 1:30 pm
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