DP12373 Shadow Banking and the Four Pillars of Traditional Financial Intermediation
|Author(s):||Emmanuel Farhi, Jean Tirole|
|Publication Date:||October 2017|
|Keyword(s):||CCPs, deposit insurance, lender of last resort, migration, Retail and shadow banks, ring fencing, Supervision|
|JEL(s):||E44, E58, G21, G28|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12373|
Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This vision has been shattered by repeated bailouts of shadow financial institutions. This paper puts "special depositors and borrowers'" at the core of the analysis, provides a rationale for the covariation yielding the quadrilogy, and analyzes how prudential regulation must adjust to the possibility of migration toward less regulated spheres. Ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms are motivated by the supervision of syphoning and financial contagion.