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RWP 23-13, November 2023

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.

JEL Classifications: D82, G21, G28, G32, L25

Article Citation

  • Antón, Arturo, Kaniska Dam, and Rajdeep Sengupta. 2023. “Financing Modes and Lender Monitoring.” Federal Reserve Bank of Kansas City, Research Working Paper no. 23-13, November. Available at External Link


Rajdeep Sengupta

Senior Economist

Rajdeep Sengupta is a senior economist at the Federal Reserve Bank of Kansas City. He joined the Kansas City Fed in July 2013. His research areas are banking, financial intermedi…