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Shadow Banking and Financial Stability under Limited Deposit Insurance

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  • Voellmy, Lukas

Abstract

This paper proposes a new theory of shadow banking that highlights the role of the cap on deposit insurance at traditional banks. Very risk averse investors with large endowments (institutional cash-pools) are looking for the best alternative to insured bank deposits. This is provided by shadow banks that invest exclusively in assets with very low credit risk. In equilibrium, investors face a trade-off between shadow banks with low fundamental risk and commercial banks with low run risk.

Suggested Citation

  • Voellmy, Lukas, 2017. "Shadow Banking and Financial Stability under Limited Deposit Insurance," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168262, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc17:168262
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    References listed on IDEAS

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    8. Luck, Stephan & Schempp, Paul, 2014. "Banks, shadow banking, and fragility," Working Paper Series 1726, European Central Bank.
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    Cited by:

    1. Schilling, Linda, 2017. "Optimal Forbearance of Bank Resolution," MPRA Paper 112409, University Library of Munich, Germany.

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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