The Rise of Shadow Banking: Evidence from Capital Regulation

• Authors: José-Luis Peydró.
• BSE Working Paper: 110571 | May 19
• 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
• shadow banks
• risk-based capital regulation
• Basel III
• interactions between banks and nonbanks
• trading by banks
• distressed debt

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 has important spillovers: during the 2008 crisis, loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.