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Journal of Finance Vol. 72 No. 6 2017

The Macroeconomics of Shadow Banking

Alan Moreira; Alexi Savov1

1 Alan Moreira is with the University of Rochester. Alexi Savov is with New York University and NBER. We thank Ken Singleton (the Editor), the anonymous Associate Editor, two referees, Nick Barberis, Markus Brunnermeier, Douglas Diamond, Marco Di Maggio, Sebastian Di Tella, Itamar Drechsler, Gary Gort

Abstract

We build a macrofinance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The model generates slow recoveries, collateral runs, and flight‐to‐quality effects, and it sheds light on Large‐Scale Asset Purchases, Operation Twist, and other interventions.

DOI
10.1111/jofi.12540
Volume
72
Issue
6
Pages
2381-2432
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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