Working Paper: NBER ID: w28501
Authors: Juliane Begenau; Tim Landvoigt
Abstract: How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulation. Tighter capital requirements for regulated banks cause higher convenience yield on debt of all banks, leading to higher shadow bank leverage and a larger shadow banking sector. At the same time, tighter regulation eliminates the subsidies to commercial banks from deposit insurance, reducing the competitive pressures on shadow banks to take risks. The net effect is a safer financial system with more shadow banking. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 16%.
Keywords: No keywords provided
JEL Codes: E41; E44; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tighter capital requirements for regulated banks (G28) | higher convenience yield on debt of all banks (G21) |
| tighter capital requirements for regulated banks (G28) | shadow bank leverage (F65) |
| tighter regulation eliminates the subsidies to commercial banks from deposit insurance (G28) | reduces competitive pressures on shadow banks (G21) |
| reduces competitive pressures on shadow banks (G21) | safer financial system (G28) |
| tighter capital requirements for regulated banks (G28) | reduction of financial fragility (G32) |
| tighter capital requirements for regulated banks (G28) | reduces riskiness of commercial banks (G21) |
| tighter capital requirements for regulated banks (G28) | increases shadow bank leverage modestly (F65) |