Working Paper: NBER ID: w20288
Authors: Samuel G. Hanson; Andrei Shleifer; Jeremy C. Stein; Robert W. Vishny
Abstract: We examine the business model of traditional commercial banks in the context of their co-existence with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in different ways. Traditional banks create safe claims by relying on deposit insurance, supported by costly equity capital. This structure allows bank depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.
Keywords: Banks; Shadow Banks; Financial Intermediation; Fixed-Income Assets
JEL Codes: G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stable funding structure (G32) | Ability to hold illiquid fixed-income assets (G12) |
| Traditional banks avoid fire sales (G21) | Higher market share in illiquid assets (G19) |
| Unstable funding of shadow banks (F65) | Forced liquidations that depress asset prices (G33) |
| Funding stability (E63) | Asset price volatility (G19) |
| Structure of financial intermediation (G21) | Non-fundamental price movements (E39) |