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.