A Model of Shadow Banking

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 ass...

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Bibliographic Details
Published in:The Journal of finance (New York) 2013-08, Vol.68 (4), p.1331-1363
Main Authors: GENNAIOLI, NICOLA, SHLEIFER, ANDREI, VISHNY, ROBERT W.
Format: Article
Language:English
Subjects:
Bank liquidity
Bank loans
Bank portfolios
Banking crises
Banking system
Debt
Diversification
Financial investments
Financial leverage
Financial risks
Financial securities
Investment risk
Investors
Portfolio diversification
Portfolio management
Rational expectations
Risk exposure
Securitization
Shadow banking
Shadow banks
Studies
Trade intermediaries
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Summary: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 neglect tail risks.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12031