Shadow banking, macroprudential regulation and redistributional effects

Rubio, Margarita

Abstract

This paper studies the implications of increasing the size of the shadow banking sector for economic activity, financial stability, and welfare. I consider a DSGE model in which lending can come from two different sources; a formal bank or private lending. Banking regulation, in the form of capital requirements, only applies to the formal banking sector. Private lenders represent the shadow banking system. Results show that an increase in shadow banking leads to a higher amount of credit in the economy, which in turn implies higher consumption by borrowers. However, after a certain threshold, a large proportion of shadow banking is welfare decreasing. Moreover, the presence of an unregulated banking sector can lead to unintended effects of macroprudential policy. That is, stricter regulation in the traditional banking sector by the authorities may result in an increase in credit flows to those banks with lower regulatory levels, especially when this regulation comes from borrower-based instruments. Thus, macroprudential authorities should take into account these redistributional effects of shadow banking when considering their regulatory perimeter.

Citation

Rubio, M. (2024). Shadow banking, macroprudential regulation and redistributional effects. European Journal of Finance, https://doi.org/10.1080/1351847X.2024.2401590

• Journal Article Type: Article
• Acceptance Date: Aug 28, 2024
• Online Publication Date: Oct 3, 2024
• Publication Date: Oct 3, 2024
• Deposit Date: Sep 2, 2024
• Publicly Available Date: Apr 4, 2026
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1080/1351847X.2024.2401590
• Public URL: https://nottingham-repository.worktribe.com/output/39163951
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/1351847X.2024.2401590