Sustainable Shadow Banking†

Sustainable Shadow Banking† AbstractBanking regulation is beneficial because it constrains banks' portfolios to prevent excessive risk taking. But given that regulators usually know less than a bank about its investment opportunities, regulation comes at the cost of foregoing profitable investments. I argue that shadow banking improves welfare because it provides a channel to escape excessive regulation that is asymmetrically more valuable for banks with access to efficient investment opportunities. I propose a novel intervention that improves welfare further by taxing shadow activities, subsidizing regulated activities and allowing banks to self-select into being regulated or not. (JEL D82, G21, G28, G31, G32, L25) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Sustainable Shadow Banking†

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Publisher
American Economic Association
Copyright
Copyright © 2018 © American Economic Association
ISSN
1945-7715
D.O.I.
10.1257/mac.20150346
Publisher site
See Article on Publisher Site

Abstract

AbstractBanking regulation is beneficial because it constrains banks' portfolios to prevent excessive risk taking. But given that regulators usually know less than a bank about its investment opportunities, regulation comes at the cost of foregoing profitable investments. I argue that shadow banking improves welfare because it provides a channel to escape excessive regulation that is asymmetrically more valuable for banks with access to efficient investment opportunities. I propose a novel intervention that improves welfare further by taxing shadow activities, subsidizing regulated activities and allowing banks to self-select into being regulated or not. (JEL D82, G21, G28, G31, G32, L25)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jan 1, 2018

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