Abstract
How does the presence of “shadow banks” – non-bank, unregulated financial intermediaries – affect the ability of central banks to tackle a liquidity crisis? To address this question, we develop an asset pricing model with both bank and non-bank financial institutions. A crucial part of the model is that banks intermediate liquidity between the central bank and non-banks, but this intermediation stops during a financial crisis. Non-banks are then left without a lender-of-last-resort, and central bank liquidity operations with banks are not sufficient to mitigate the crisis. In our stylized model, opening liquidity facilities to non-banks and purchasing illiquid assets are then essential measures to tackle a liquidity crisis.