Type
Article
Titre
Shadow Banking and Bank Capital Regulation
Volume
28
Numéro
1
Pages
146 - 175 p.
ISSN
08939454
DOI
10.1093/rfs/hhu055
Mots clés
Shadow banking activity, Banking system, Banking crisis, Unregulated Banking
Résumé
EN
Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.
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