Sustainable Shadow Banking
Commercial banks are subject to regulation that restricts their investments. When banks are concerned for their reputation, however, they could self-regulate and invest more efficiently. Hence, a shadow banking that arises to avoid regulation has the potential to improve welfare. Still, reputation concerns depend on future economic prospects and may suddenly disappear, generating a collapse of shadow banking and a return to traditional banking, with a decline in welfare. I discuss how a combination of traditional regulation and cross reputation subsidization may enhance shadow banking and make it more sustainable.
The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Guillermo Ordoñez, 2018. "Sustainable Shadow Banking," American Economic Journal: Macroeconomics, vol 10(1), pages 33-56. citation courtesy of