Reference : The Law and Economics of Shadow Banking
Parts of books : Contribution to collective works
Law, criminology & political science : Economic & commercial law
Finance
http://hdl.handle.net/10993/29464
The Law and Economics of Shadow Banking
English
Pacces, Alessio M. mailto [Erasmus School of Law, Erasmus University Rotterdam - Rotterdam Institute of Law and Economics; European Corporate Governance Institute]
Nabilou, Hossein mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Law Research Unit >]
2018
Research Handbook on Shadow Banking: Legal and Regulatory Aspects
Chiu, Iris H.
MacNeil, Iain
Edward Elgar
No
[en] Shadow banking ; Maturity transformation ; Safe assets
[en] This essay discusses the economic case for regulating shadow banking. It asks three questions. First, what is shadow banking? Second, why shadow banking should be regulated. Third, how to regulate shadow banking efficiently.
Although shadow banking is, like banking, based on maturity transformation, no definition of shadow banking is ideal for regulatory purposes. Focusing on systemic risk, we take an instrument-based approach and define banking as leveraging on collateral to support liquidity promises. For regulation to be effective, however, this definition must be combined with other entity-based approaches.
The economic rationale for regulating shadow banking is the negative externality stemming from systemic risk. Because uncertainty makes any measure of systemic risk imprecise, quantity regulation is preferable to a Pigovian tax to cope with this externality. Regulation should limit the leverage of shadow banking by imposing a minimum haircut regulation on the assets being used as collateral for funding.
In theory, minimum haircuts regulation is an efficient way to constrain shadow banking. However, the practical difficulties of monitoring leverage at the assets level call for an indirect regulation of institutional leverage, too. This is effectively achieved through the regulation of bank leverage, which increases the cost of liquidity puts to shadow banking. Such risk-insensitive restrictions, however, undermine the efficiency of banking, whether official or shadow.
http://hdl.handle.net/10993/29464

File(s) associated to this reference

Fulltext file(s):

FileCommentaryVersionSizeAccess
Open access
The law & economics of shadow banking.pdfPublisher postprint773.64 kBView/Open

Bookmark and Share SFX Query

All documents in ORBilu are protected by a user license.