The rise of shadow banking: evidence from capital regulation

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

doi:http://dx.doi.org/10.1093/rfs/hhaa106

The rise of shadow banking: evidence from capital regulation

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Citation

Irani RM, Iyer R, Meisenzahl RR, Peydró JL. The rise of shadow banking: evidence from capital regulation. The Review of Financial Studies. 2021 May;34(5):2181-35. DOI: 10.1093/rfs/hhaa106

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.