Working Paper: CEPR ID: DP10435
Authors: Tobias Adrian
Abstract: This paper explores financial stability policies for the shadow banking system. I tie policy options to economic mechanisms for shadow banking that have been documented in the literature. I then illustrate the role of shadow bank policies using three examples: agency mortgage real estate investment trusts, leveraged lending, and captive reinsurance affiliates. For each example, the economic mechanisms are explained, the potential risks emanating from the activities are described, and policy options to mitigate such risks are listed. The overarching theme of the analysis is that any policy prescription for the shadow banking system is highly specific relative to the particular activity.
Keywords: financial intermediation; shadow bank policies; systemic risk
JEL Codes: E44; G00; G01; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| specialization in shadow banking (G29) | economic efficiency (D61) |
| specialization in shadow banking (G29) | systemic risks (F65) |
| mispriced guarantees from government backstops (H81) | excessive risk-taking in shadow banking (F65) |
| excessive risk-taking in shadow banking (F65) | vulnerabilities in the broader financial system (F65) |
| regulatory arbitrage (G18) | increased leverage and risk-taking (F65) |
| changes in capital requirements (G28) | mitigate regulatory arbitrage (G18) |
| neglected risk accumulation (D81) | financial instability (F65) |
| policies aimed at improving reporting and monitoring systems (H83) | mitigate neglected risk (E71) |