Time: 12:15 pm – 1:30 pm
Date: 19th of December 2017
Place: Room 3001.

Victor LYONNET (CREST-HEC Paris) –  JOB MARKET PRACTICE – “Traditional and Shadow Banks”

Abstract: 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. This creates a complementarity between traditional and shadow banks. We show that in equilibrium, the two bank types 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.

Organizers & Sponsors : CREST