In our recent paper, we discuss the economic case for regulating shadow banking and ask three questions. First, what is shadow banking? Second, why should it be regulated? And third, what’s an efficient way to regulate it? We focus on systemic risk, defined as the likelihood of a financial system failure so serious that it impairs the financing of production and consumption. We argue that such a risk can never be measured precisely enough to predict financial crises.
Our paper examines shadow banking on the basis of its contribution to systemic risk. We argue that shadow banking should be regulated … Read more