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In the shadow of shadow banking: a liquidity perspective

Author

Listed:
  • Liu, Zehao

    (School of Finance, Renmin University of China)

  • He, Ping

    (School of Economics and Management, Tsinghua University)

  • Xie, Chengbo

    (School of Finance, Southwestern University of Finance and Economics)

Abstract

Liquidity requirements for commercial banks improve risk-sharing for depositors. Nevertheless, shadow banks, issuing securities with lower liquidity, operate outside such regulatory constraints. In an economy featuring shadow banks with a constant level of liquidity for shadow bank securities, higher liquidity requirements lead to a reduction in aggregate liquidity provision, owing to regulatory arbitrage incentives. Conversely, when the liquidity of shadow bank securities decreases with the market share of shadow banks, the incentive for regulatory arbitrage is reduced, and thus higher liquidity requirements could enhance aggregate liquidity provision.

Suggested Citation

  • Liu, Zehao & He, Ping & Xie, Chengbo, 0. "In the shadow of shadow banking: a liquidity perspective," Theoretical Economics, Econometric Society.
    • Handle: RePEc:the:publsh:5712
    as

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    More about this item

    Keywords

    Shadow banking; liquidity requirements; regulatory arbitrage; liquidity shortage; search and matching;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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