Banking and Non-banking Capital Flows and The Sectorial Reallocation of Credit Away from Companies

Abstract

Are capital inflows into non-banks and banks associated with a decrease in the share of domestic bank loans to companies? We establish that the share of credit to companies is more sensitive to the bank portfolio inflows compared to the non-bank inflows. This contrasts with the negative relationship with the share of credit to the household sector. Thus, evidence supports the theory of the prevalence credit reallocation dynamics towards companies. Furthermore, evidence shows that the share of credit to companies increases due to an unexpected increase in various capital flow categories. There is a significant increase in the reallocation of credit to companies due to positive portfolio flows, portfolio bank flows and non-bank flow shocks. In addition, capital flows play a dampening role in the response of the repo rate to positive inflation shocks. The inflation target is binding, and policymakers respond to inflationary pressures irrespective of the sources. For prudential policy, the evidence of the prevalence credit reallocation towards companies means that capital flows can result in excesses in some market segments. To mitigate the build-up of such imbalances and the potential negative spillover effects requires targeted regulatory tools instead of broad regulation.