Finance and Economics Discussion Series (FEDS)
May 2023
Less Bank Regulation, More Non-Bank Lending
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: Non-bank lending, bank deregulation, credit supply, loan liquidity, industrial organization of financial markets
DOI: https://doi.org/10.17016/FEDS.2023.026
PDF: Full Paper
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