We build a moral hazard model to study incentives of financial intermediaries (shortly, bankers) facing a leverage-insurance trade-off in their investment choice. We demonstrate that the choice is affected by two recent transformations of the financial ecosystem bankers inhabit: (i) the rise of...

4207 The system of non-bank financial intermediaries (NBFI; i.e., shadow banks) has grown rapidly in recent decades up to a roughly size of about Dollar 71 trillion. Shadow banks moved for a number of reasons into the focus of regulatory authorities: (1) the risks associated with circumventing...

We study the effects of shadow banking panics in a macroeconomic model with a rich financial system, including deposit-financed retail banks and wholesale-financed shadow banks. The model can quantitatively match the dynamics of key variables around the US financial crisis. Wholesale funding...