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Shadow Banking and Bank Capital Regulation

Author

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  • Guillaume Plantin

    (Sciences Po Paris and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)

Abstract

Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all the costs that their insolvency creates for the non-financial agents using their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow-banking system, it may be optimal to relax capital requirements so that liquidity dries up in the shadow-banking system. Tightening capital requirements may spur a surge in shadow-banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.

Suggested Citation

  • Guillaume Plantin, 2014. "Shadow Banking and Bank Capital Regulation," Working Papers 322014, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:322014
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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