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Deposit insurance and the coexistence of commercial and shadow banks

Author

Listed:
  • Stephen F. LeRoy

    (University of California Santa Barbara)

  • Rish Singhania

    (University of Exeter)

Abstract

We investigate how deposit insurance affects the structure of the financial system in a general equilibrium setting in which a government insurer guarantees deposits at commercial banks, but not at shadow banks. With deposit-based or risky-asset-based insurance premia, price distortions induced by subsidized deposit insurance benefit shadow banks, by allowing these banks to trade to their advantage. Insured commercial banks and uninsured shadow banks coexist under subsidized deposit insurance. Capital requirements on commercial banks make shadow banking more attractive. The asset price distortion is eliminated when the aggregate subsidy to unsuccessful commercial banks equals the aggregate penalty to successful banks.

Suggested Citation

  • Stephen F. LeRoy & Rish Singhania, 2020. "Deposit insurance and the coexistence of commercial and shadow banks," Annals of Finance, Springer, vol. 16(2), pages 159-194, June.
    • Handle: RePEc:kap:annfin:v:16:y:2020:i:2:d:10.1007_s10436-020-00359-z
    DOI: 10.1007/s10436-020-00359-z
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    Cited by:

    1. Voellmy, Lukas, 2019. "Shadow banking and financial stability under limited deposit insurance," ESRB Working Paper Series 105, European Systemic Risk Board.

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    More about this item

    Keywords

    Deposit insurance; Shadow banks; Bank regulation; Capital requirements;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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