Working Paper: CEPR ID: DP18044
Authors: Mary Chen; Seung Jung Lee; Daniel Neuhann; Farzad Saidi
Abstract: Bank deregulation in the form of the repeal of the Glass-Steagall Act facilitated the entry of non-bank lenders into the market for syndicated loans during the pre-2008 credit boom. Institutional investors disproportionately purchase tranches of loans originated by universal banks able to cross-sell loans and underwriting services to firms (as permitted by the repeal). A shock to cross-selling intensity increases loan liquidity at origination and over time. The mechanism is that non-loan exposures ensure monitoring even when banks retain small loan shares. Our findings complement the conventional view that regulatory arbitrage caused the rise of non-bank lenders.
Keywords: nonbanks; Glass-Steagall Act; bank regulation
JEL Codes: G20; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| repeal of the Glass-Steagall Act (G28) | increased loan liquidity (G21) |
| universal banks (UBs) cross-sell loans and underwriting services (G21) | increased loan liquidity (G21) |
| deregulation (L51) | entry of nonbank lenders into the syndicated loan market (G21) |
| economies of scope (D26) | enhanced trust among institutional investors (G23) |
| non-loan exposures (F65) | monitoring of loans (G21) |
| monitoring of loans (G21) | maintaining loan quality (G21) |