Working Paper: CEPR ID: DP12913
Authors: Rustom M. Irani; Rajkamal Iyer; Ralf Meisenzahl; Jos Luis Peydr
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 identi cation, 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 nd 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 has important spillovers: during the 2008 crisis, loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.
Keywords: shadow banks; risk-based capital regulation; Basel III; interactions between banks and nonbanks; trading by banks; distressed debt
JEL Codes: G01; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| less-capitalized banks (G21) | reduce loan retention (G51) |
| reduce loan retention (G51) | increased entry of nonbanks (G21) |
| a one-standard-deviation decrease in bank capital (F65) | increase in nonbank share of loan funding (G21) |
| bank capital constraints (G28) | loan sales (G51) |
| bank capital constraints (G28) | nonbank entry (G21) |
| loans funded by nonbanks (G21) | greater price volatility (G13) |
| loans funded by nonbanks (G21) | reduced availability during financial crises (E44) |
| lower tier 1 capital ratios (G32) | sell loan shares (G51) |
| sell loan shares (G51) | enhance regulatory capital ratios (G28) |