C03: Shadow banking

Banks compete against and cooperate with many other kinds of institutions in financial markets that perform similar functions but are not legally regulated as banks. While the project has analyzed particular features of these so-called shadow banks during the first funding period, it will study the interaction, competition, and complementarities of banks and shadow banks more broadly in the second funding period. This broader perspective will also include a stronger empirical emphasis.

One work package of the project will study competition and complementarity of banks, shadow banks, and other non-banks in various segments of financial markets, ranging from money market mutual funds to loan syndicates. This will include work on particular technological advances in finance, such as the blockchain technology. These financial structures have important consequences for product markets and the distribution of wealth in the economy, which we propose to investigate in a second work package. It is devoted to problems ranging from the efficiency consequences of lending structures with common creditors to the empirical relation between credit supply and wage structures in an economy, and the impact of government interventions in the wake of banking crises on inequality. The third work package will consider consequences of financial market frictions for monetary policy. This work will include the study of the monetary transmission of negative interest rates by the European Central Bank (ECB) through financial intermediaries, the use and determinants of the safe interest rate in imperfectly competitive banking markets, and the reaction of the private financial sector to the ECB’s massive asset purchase programs during the Covid-19 pandemic.