Macroprudential regulation and leakage to the shadow banking sector

Abstract

We study the effects of macroprudential commercial bank regulation on the shadow banking sector via an estimated New Keynesian DSGE model that differentiates between monopolistically competitive commercial banks and shadow banks that rely on funding in a perfectly competitive market for investments. We find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating macroprudential tightening with monetary easing can limit this leakage mechanism, while overall maintaining a reduction in aggregate lending. In a counterfactual analysis we compare how macroprudential policy implemented before the 2008 financial crisis would have affected business and lending cycles.