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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Rise of Shadow Banking : Evidence from Capital Regulation
Rustom M. Irani
Rajkamal Iyer
Ralf R. Meisenzahl
Jose Luis Peydro
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 and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.


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Rustom M. Irani & Rajkamal Iyer & Ralf R. Meisenzahl & Jose Luis Peydro, The Rise of Shadow Banking : Evidence from Capital Regulation, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2018-039, 20 Jun 2018.
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Keywords: Shadow banks ; Risk-based capital regulation ; Basel III ; Interactions between banks and nonbanks ; Trading by banks ; Distressed debt
DOI: 10.17016/FEDS.2018.039
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