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Markets, banks, and shadow banks

Markets, banks, and shadow banks

We consider two types of bank capital regulation: risk-insensitive (or flat) and risk-sensitive capital requirements. The former broadly match the 1988 Accord of the Basel Committee (Basel I), as the latter match the 2004 (Basel II) and 2010 (Basel III) Accords (although Basel III combines risk-sensitive capital requirements with a risk-insensitive leverage ratio). We highlight the various effects these regulations have on the equilibrium market structure, with especial focus on if they shift some types of lending from regulated banks into shadow banks or direct market finance, in addition to their impact on the entire risk of the economic climate.