1. Deposit Insurance and the Coexistence of Commercial and Shadow Banks
Stephen F. LeRoy and Rish Singhania
Discussion:
Lamont Black

2. Main Idea
Deposit insurance affects the structure of the financial system
Banks vs. shadow banks
Deposit insurance affects the price of risky assets
Buying vs. selling

3. The Model
Agents choose commercial bank or shadow bank
Commercial banks have insured deposits
Tradeoff: expected insurance benefit vs. insurance premium
High premiums make shadow banks more attractive

4. Price Distortions
Price distortions can indirectly benefit shadow banks
Commercial banks and shadow banks trade risky assets
Deposit-based premiums banks buy
Risk-based premiums banks sell
Failing banks overpay for risky assets

5. Suggestions 1
Add external uninsured debt
Partial insurance and wholesale debt
Weaken Modigliani-Miller
“market discipline”
E.g., cost rises with risk in period 2
Add underfunded insurance externality (revenue favorable to commercial banks)
Lump sum tax beyond shadow banks?

6. Suggestions 2
Big shocks
The productivity shock is idiosyncratic
Add an aggregate shock
Add a commercial/shadow bank shock
Fire sales
Make the risky asset mark-to-market
How would these elements interact with deposit insurance?

7. Directions for Future Research
Add liquidity risk in shadow banks
Dis-intermediation in good times
Re-intermediation in bad times
What if shadow banks fail?
Explore the technology of FINTECH
E.g., capital market funding for loans
“fintech charter” (OCC)