Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210880 
Authors: 
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series No. 105
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
I study the relation between shadow banking and financial stability in an economy in which banks are susceptible to self-fulfilling runs and in which government-backed deposit insurance is limited. Shadow banks issue only uninsured deposits while commercial banks issue both insured and uninsured deposits. The effect of shadow banking on financial stability is ambiguous and depends on the (exogenous) upper limit on insured deposits. If the upper limit on insured deposits is high, then the presence of a shadow banking sector is detrimental to financial stability; shadow banking creates systemic instability that would not be present if all deposits were held in the commercial banking sector. In contrast, if the upper limit on insured deposits is low, then the presence of a shadow banking sector is beneficial from a financial stability perspective; shadow banks absorb uninsured (and uninsurable) deposits from the commercial banking sector, thereby shielding commercial banks from runs. While runs may occur in the shadow banking sector, the situation without shadow banks and a larger amount of uninsured deposits held at commercial banks is worse.
Subjects: 
Shadow Banking
Deposit Insurance
Bank Runs
Financial Intermediation
JEL: 
E44
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-119-8
Document Type: 
Working Paper

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