Securitization, shadow banking system and macroprudential regulation: A DSGE approach

We investigate the role of macroprudential policy in the presence of traditional banks and shadow intermediaries through the lens of a dynamic, stochastic, general equilibrium (DSGE) model. We examine how the shadow financial system affects macroeconomic activity and financial stability via the transmission channels of the securitization market. In general equilibrium, securitization leads to the emergence of moral hazard and regulatory arbitrage, which are not internalized by the financial system. The model uncovers a tradeoff. On the one hand, shadow intermediaries increase aggregate efficiency by allowing for capital redeployment through the securitization market. On the other hand, they exacerbate externalities underlying financial intermediation. We show that a macroprudential authority aiming at mitigating these externalities via limits to bank leverage and caps to securitization in the traditional banking sector, faces a welfare-volatility tradeoff. The results call for policy measures addressed to the shadow banking sector in order to ensure a more stable financial system.