Paper #1652

Title:

The rise of shadow banking: evidence from capital regulation

Authors:

Rustom M. Irani, Rajkamal Iyer, Ralf R. Meisenzahl and José-Luis Peydró

Date:

April 2018 (Revised: July 2020)

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, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation is associated with important adverse effects during the 2008 crisis: loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.

Keywords:

Shadow banks; risk-based capital regulation; Basel III; interactions between banks and nonbanks; trading by banks; distressed debt

JEL codes:

G01, G21, G23, G28

Area of Research:

Finance and Accounting / Macroeconomics and International Economics

Published in:

Review of Financial Studies 34(5), May 2021, 2181-2235. DOI: https://doi.org/10.1093/rfs/hhaa106

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