The Rise of Shadow Banking: Evidence from Capital Regulation

Abstract

We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation {is associated with} important adverse effects during the 2008 crisis: loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.

Contrasting Worldviews at Bank and Securities Market Regulators

“…Investors and customers can be protected, in part, by 6. For example, Irani et al (2019) show that as bank capital requirements have risen over the 1993-2014 period, banks have held an ever-smaller proportion of leveraged loans to large corporations. Other holders (including insurance companies, hedge funds, and collateralized loan obligations [CLOs]) have increased their share.…”

The Stability of Banking System with Shadow Banking on Different Interbank Network Structures

“…Elgin and Oztunali [42] noted through a two-sector dynamic general equilibrium model that the relative size of shadow banking will influence the banking system's stability. Besides, Irani et al [43] investigated the connections between bank capital regulation and the lightly regulated shadow banks. Loayza et al [44] and Elias [45] qualitatively analyzed the effect of shadow banking on the banking system's stability from the perspective of the labor market and the money market fund, respectively.…”

Ownership Concentration and Performance of Deteriorating Syndicated Loans

“…We also complement a growing literature exploring the consequences of asset sales by financial intermediaries. A strand of this literature studies the sales of loan shares by banks (Irani and Meisenzahl 2017;Irani et al 2021), and CLOs (e.g., Loumioti and Vasvari (2019); Elkamhi and Nozawa (2020)) in the secondary loan market. While existing studies focus on the financing conditions of these highly regulated intermediaries, we consider how changes in loan health affect syndicate composition and how the latter is related to the subsequent performance of the loan.…”