Macroprudential Regulation and Leakage to the Shadow Banking Sector

Abstract

Macroprudential policies for financial institutions have received increasing prominence since the global financial crisis. These policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. For this purpose, we develop a DSGE model that differentiates between regulated, monopolistically competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999-2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating the macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. We discuss how regulators that either do or do not consider credit leakage to shadow banks set policy in response to macroeconomic shocks. Lastly, in a counterfactual analysis, we then compare how a macroprudential policy implemented before the crisis on all financial institutions, or just on commercial banks, would have dampened the leverage cycle.

A prolonged period of low interest rates in Europe: Unintended consequences

“…Increasing regulatory requirements in the banking sector have created incentives for regulatory arbitrage (the structuring of activities in a way that reduces the impact of regulation without a corresponding reduction in the underlying risk; see, for example, Buchak et al, 2018) and leakages (the shifting of activities to nonbank financial institutions; see, for example, Gebauer & Mazelis, 2020). Regulatory arbitrage and leakages maintain downward pressure on lending and funding rates through competition from nonbank financial institutions.…”

La interacción entre la política macroprudencial y la política monetaria

“…La cuestión es mucho más relevante si tenemos en cuenta que el diseño de la política macroprudencial está dirigido principalmente al sector financiero bancario. En un escenario económico en el que el sector financiero no bancario cobra cada vez mayor relevancia, es clave la coordinación entre política macroprudencial y monetaria con el fin de limitar el flujo de préstamos del sector bancario (más regulado) hacia el no bancario o en la sombra (Gebauer & Mazelis, 2020). El diseño de la política monetaria es crucial para afectar a este último tipo de entidades, ya que su actividad se ve sobre todo alterada por variaciones en el tipo de interés, más que por medidas macroprudenciales propiamente dichas.…”

Diverse Outreach of Macroprudential Policy Effect on Household and Non-Financial Corporate Loan: An Indication of Macroprudential Policy Leak?

“…Hence, when the banking sector's access is tightened, the access is switched to other financial providers, including foreign sectors (Dumičić, 2018). The nature of the corporate sector's risk-taking behavior enables them to access loans from various sources from domestic and foreign banks, non-bank financial institutions, or shadow banking, resulting in less effective macroprudential policy to achieve financial system stability (Cerutti et al, 2015;Dumičić, 2018;Gebauer & Mazelis, 2019;Hodula & Ngo, 2021) Another cause of the ineffectiveness was the more emphasis of the policy to target household sector credit rather than the credit to the corporate sector. For example, Cerutti et al (2015) showed that although the credit in both sectors gets into the outreach of macroprudential policy, the policy approach to control credit growth in the household sector is more prevalent than the corporate sector.…”