DP12913 The Rise of Shadow Banking: Evidence from Capital Regulation

Author(s): Rustom M Irani, Rajkamal Iyer, Ralf Meisenzahl, José Luis Peydró
Publication Date: May 2018
Keyword(s): Basel III, Distressed debt, Interactions between banks and nonbanks, Risk-based capital regulation, Shadow banks, Trading by banks
JEL(s): G01, G21, G23, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12913

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.