Working Paper

The Rise of Shadow Banking : Evidence from Capital Regulation


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.

Keywords: Shadow banks; Risk-based capital regulation; Basel III; Interactions between banks and nonbanks; Trading by banks; Distressed debt;

JEL Classification: G01; G21; G23; G28;

https://doi.org/10.17016/FEDS.2018.039

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2018-06-20

Number: 2018-039