Shadow Banking and the Four Pillars of Traditional Financial Intermediation

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Traditional banking is built on four pillars: SME lending, insured deposit
taking, access to lender of last resort, and
prudential supervision. This paper unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary. 
The model also shows how prudential regulation must adjust to the emergence of shadow banking, and rationalizes
structural remedies to counter financial contagion:
ring-fencing between regulated and shadow banking and the sharing
of liquidity in centralized platforms.


Revise and resubmit, Review of Economic Studies.
Last updated on 02/19/2020