TY  - JOUR
AU  - Gennaioli,Nicola
AU  - Shleifer,Andrei
AU  - Vishny,Robert W.
TI  - A Model of Shadow Banking
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17115
PY  - 2011
Y2  - June 2011
UR  - http://www.nber.org/papers/w17115
L1  - http://www.nber.org/papers/w17115.pdf
N1  - Author contact info:
Nicola Gennaioli
Department of Finance
Università Bocconi
Via Roentgen 1
20136 Milan, Italy
E-Mail: ngennaioli@crei.cat

Andrei Shleifer
Department of Economics
Harvard University
Littauer Center M-9
Cambridge, MA 02138
Tel: 617/495-5046
Fax: 617/496-1708
E-Mail: ashleifer@harvard.edu

Robert W. Vishny
Booth School of Business
The University of Chicago
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-2522
Fax: 773/834-1920
E-Mail: Rvishny@gmail.com
AB  - We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt.  In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010).  Under rational expectations, the shadow banking system is stable and improves welfare.  When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.
ER  -