Working Paper

Financing Modes and Lender Monitoring

Abstract: Shadow banks are widely believed to be a creation of financial regulation and regulatory arbitrage. We show that bank and nonbank modes of financing can emerge endogenously in a simple borrower-lender framework absent regulatory arbitrage or policy interventions. The coexistence of banks and shadow banks in the absence of regulatory intervention speaks to the importance of shadow banks as alternative modes of financial intermediation. We explore the scope of regulation in determining the size and location of shadow banking, as opposed to how regulation can be designed to curtail shadow bank activities.

Keywords: banking and finance; monetary policy; shadow banks; regulatory arbitrage; financial regulations;

JEL Classification: D82; G21; G28; G32; L25;

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Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2023-11-07

Number: RWP 23-13