Premium
A Model of Shadow Banking
Author(s) -
GENNAIOLI NICOLA,
SHLEIFER ANDREI,
VISHNY ROBERT W.
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12031
Subject(s) - securitization , diversification (marketing strategy) , leverage (statistics) , market liquidity , debt , business , financial system , shadow banking system , shadow (psychology) , monetary economics , economics , financial economics , finance , psychology , marketing , machine learning , computer science , psychotherapist
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.