Less Bank Regulation, More Non-Bank Lending

Chen, Mary; Lee, Seung Jung; Neuhann, Daniel; Saidi, Farzad

doi:10.17016/FEDS.2023.026

Working Paper

Less Bank Regulation, More Non-Bank Lending

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: Non-bank lending; Bank deregulation; Credit supply; Loan liquidity; Industrial organization of financial markets;

JEL Classification: G20; G21; G23; G28;

https://doi.org/10.17016/FEDS.2023.026