We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and...

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...

Four years since the darkest moments of the financial crisis, regulators and policy makers are facing a daunting task of calibrating a set of rules that covers in a sensible fashion the various components of the shadow banking system. It is laudable that EU policy makers and regulators recognise...