Abstract
Stable conventional expectations of counterparty liquidity and solvency determined the stability of shadow banks due to roll over risk. Evidence from elite interviews, as well as primary and secondary sources, show that regulators’ interventions during the bailout of hedge fund Long-Term Capital Management in 1998, assistance to J.P. Morgan to purchase Bear Stearns in March 2008, and nationalization of Fannie Mae and Freddie Mac in September 2008 created a conventional expectation that regulators would provide deposit insurance to shadow banking conduits. As a result, bank runs were not generalized across all financial institutions prior to the failure of Lehman Brothers, rendering financial risks idiosyncratic rather than systemic.
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Shenai, N. (2018). Regulators as Liquidity Providers of Last Resort. In: Social Finance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-91346-9_5
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