Beiträge zur Jahrestagung des Vereins für Socialpolitik 2017: Alternative Geld- und Finanzarchitekturen - Session: Banking IV G15-V3
This paper proposes a new theory of shadow banking that highlights the role of the cap on deposit insurance at traditional banks. Very risk averse investors with large endowments (institutional cash-pools) are looking for the best alternative to insured bank deposits. This is provided by shadow banks that invest exclusively in assets with very low credit risk. In equilibrium, investors face a trade-off between shadow banks with low fundamental risk and commercial banks with low run risk.