Banking.

• Author: Van Doren, Peter

* "Banking without Deposits: Evidence from Shadow Bank Call Reports," by Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru. March 2020. NBER # 26903.

Financial institutions are more highly leveraged than other firms. That is, their capital structure has more debt and less equity than non-financial firms. Why?

Some scholars argue that finance is special, i.e., financial intermediation requires such a capital structure. Others say the high leverage is the result of governmentally provided deposit insurance that socializes the losses from leverage and privatizes the gains. If the former view is correct, then governments reduce efficiency by imposing minimum equity standards on banks, while if the latter is true, then capital requirements are simply an attempt to control the adverse effects of subsidized deposit insurance. (See Working Papers, Winter 2010-2011).

This paper compares the capital structure of traditional regulated banks with unregulated "shadow banks." Traditional banks accept deposits that are federally insured, issue loans, and are subject to safety and soundness banking regulations and examinations. Shadow banks (Quicken Loans, for example) do not accept deposits; they raise money from investors in the capital markets. And they are not protected by deposit insurance or subject to safety and soundness regulation.

The average equity-to-asset ratio for traditional banks is approximately 11%. Shadow banks' average equity-to-asset ratio is more than twice as high at 25% and resembles that of pre-deposit-insurance...