Moreover, consistent with the theory, these negative effects are closely aligned with the fragility of the liabilities of these nonbanks. Further, we provide evidence that this credit reallocation is associated with two adverse effects during the 2008 crisis: loans funded by nonbanks experience both a sizable reduction in credit availability (which also matters for firms’ total borrowing) and greater price volatility in the secondary market. We show how undercapitalized banks remove loans from the balance sheet, especially loans with higher capital requirements and at times when bank capital is scarce, and a significant portion of this credit is reallocated to nonbanks. Our empirical tests confirm a tight connection between banks’ regulatory capital and loan sales and trading activity in the secondary loan market. syndicated loan shares that contains unique data on the dynamics of loan share ownership among banks and nonbanks from 1993 until 2014. 4 To shine a light on this potential credit reallocation, we analyze an administrative credit register of U.S. Narrative evidence suggests an important link from strengthening bank capital regulation to the transfer of corporate credit risk out of the regulated sector, beginning in the early 2000s. In this paper, we provide new evidence on these issues in the context of the U.S. 2 Despite its importance for the design of prudential regulation ( Hanson, Kashyap, and Stein 2011 Freixas, Laeven, and Peydró 2015), there is limited empirical evidence on the relation between bank capital and shadow banking, as well as how a greater presence of shadow banks might potentially exacerbate or propagate risks in the financial system. Theoretical work emphasizes that these distinct sources of fragility at shadow banks might amplify risks in the financial system and reduce overall welfare ( Plantin 2014 Fahri and Tirole 2017 Martinez-Miera and Repullo 2018 Chretien and Lyonnet 2018), a concern echoed by the press, practitioners, and policy makers alike. 1 While shadow banks may bring fresh funding or other efficiencies (e.g., new loan pricing technologies), unlike traditional banks they cannot issue insured liabilities nor access central bank liquidity during times of marketwide stress. ![]() On the other hand, increased regulation of banks may push intermediation into unregulated financial institutions, including the “shadow banking” system. ![]() (2013) argue that banks should be subject to alternative or significantly higher capital requirements in order to mitigate risk-shifting incentives and increase financial stability (see also Flannery 2014 Thakor 2014). At the heart of the debate is the issue of capital requirements. ![]() The recent financial crisis has triggered a broad push toward increased regulation of the financial sector, and a vigorous debate about how best to implement this overhaul.
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