occur in the shadow - banking sector – notably, short - term collateralized claims such as broker - dealer repurchase agreements ( repos ) – bank deposits are noteworthy because, in the modern institutional environment, they are highly sticky and not prone to run at the first sign of trouble. in its simplest terms, our story is as follows : there are different private technologies for creating safe money - like claims. the “ banking ” technology involves meaningful amounts of capital as well as deposit insurance and thus leads to deposits that are both safe and relatively stable. the “ shadow banking ” technology uses less capital and manufactures safety by, instead, giving repo investors collateral and the right to seize the collateral on a moment ’ s notice. so shadow banking money is much more run prone than bank money. given its relatively stable nature, the banking model is better suited to investing in assets that are illiquid and subject to interim price volatility – that is, to fire - sale risk. these assets can be loans that involve significant amounts of monitoring, or they can be securities that require less monitoring. what is essential is the synergy between issuing stable types of money claims and investing in assets that have some degree of exposure to fire - sale risk. that synergy, in our view, is at the heart of the business of traditional banking. we have developed a simple theoretical model that captures the main ingredients of this story and makes some further testable predictions. it ’ s probably ill - advised over lunch, but i will take a crack at sketching this model for you here. however, let me start with three stylized facts to motivate the theory. stylized facts the first fact, and the one that i suspect will surprise you the least, is the strong homogeneity of the liability side of banks ’ balance sheets : banks are almost always and everywhere largely deposit financed. for example, in the cross section, and using year - end 2012 data, a bank at the 10th percentile of the distribution had a ratio of deposits to assets of 73. 6 percent, while a bank at the 90th percentile had a ratio of 88. 9 percent. 6 a similar homogeneity is apparent in the time series : over the past 115 years, deposits have averaged 80 percent of bank assets, with a standard deviation of only 8 percent. these patterns are in sharp contrast to those for nonfinancial firms, for which capital structure tends to be much less determinate, both

) at time 2. thus, in the bad - news state at time 1, the fundamental value of asset i is fi = qr + ( 1 - q ) zi. however, if there is bad news at time 1, the market value of asset i will be depressed by a temporary fire - sale effect and will be given by kifi = fi. the value of ki is endogenous and asset specific in our model and depends on the equilibrium quantity of asset i that is liquidated at time 1 ; i will return to this feature momentarily. household preferences are as follows : households are risk neutral over fluctuations in their consumption. however, they derive additional utility – which can be thought of as transactions services – from holding completely safe claims, since these claims can be used in a money - like fashion. the upshot of these assumptions is that households require a fixed rate of return on any risky claims, no matter how risky, but a lower rate of return on claims that can be made completely safe. these latter safe claims can be interpreted as privately created money. given these household preferences, the name of the game for financial intermediaries is to create as much in the way of safe money - like claims from each asset category i as possible. and given the structure of the model, there are two distinct technologies for creating safe claims. the first technology we label “ traditional banking. ” a traditional bank is relatively conservative in issuing safe claims. in particular, for each dollar it holds of asset i, it issues zi of deposits and finances the rest with equity. since asset i always pays off at least zi, even in the worstcase scenario, a depositor in a traditional bank can sleep through whatever news comes in at time 1 and still be assured of having a safe claim. in other words, a bank backs its deposits with enough capital so as to make these deposits safe over a two - period horizon and hence endogenously sticky ; there is no reason for bank depositors ever to run at time 1. alternatively, one can think of the bank as having acquired deposit insurance – which allows depositors to sleep through time 1 – and the deposit insurer as having imposed a capital requirement of ( 1 - zi ) on the bank so as to reduce its expected losses to zero. the second technology for creating safe claims we label “ shadow banking. ” shadow banks are more aggressive : they rely less on capital, and more on the exit option at time 1,