Journal of Finance Vol. 68 No. 4 2013

A Model of Shadow Banking

Nicola Gennaioli¹; Andrei Shleifer¹; Robert W. Vishny^2,3

¹ Directorate-General for Economic and Financial Affairs · ² Harvard University Press · ³ Bocconi University

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 neglect tail risks.

DOI

10.1111/jofi.12031

Volume

68

Issue

4

Pages

1331-1363

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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