A Model of Shadow Banking





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    • Nicola Gennaioli is with Università Bocconi, IGIER, and CREI; Andrei Shleifer is with Harvard University; and Robert W. Vishny is with University of Chicago. We are grateful to Viral Acharya, Tobias Adrian, Efraim Benmelech, John Campbell, Robin Greenwood, Samuel Hanson, Arvind Krishnamurthy, Raghu Rajan, Rafael Repullo, Matthew Richardson, Philipp Schnabl, Joshua Schwartzstein, Alp Simsek, Jeremy Stein, René Stulz, Amir Sufi, Campbell Harvey (Editor), and two anonymous referees, and especially Charles-Henri Weymuller for helpful comments. Gennaioli thanks the Barcelona Graduate School of Economics and the European Research Council under the European Union's Seventh Framework Programme (FP7/2007–2013)/ERC Grant agreement no. 24114 for financial support.


We present a model of shadow banking in which banks originate and trade loans, assemble them into diversified portfolios, and finance these portfolios externally with riskless debt. In this model: outside investor wealth drives the demand for riskless debt and indirectly for securitization, bank assets and leverage move together, banks become interconnected through markets, and banks increase their exposure to systematic risk as they reduce idiosyncratic risk through diversification. The shadow banking system is stable and welfare improving under rational expectations, but vulnerable to crises and liquidity dry-ups when investors neglect tail risks.