Does macroprudential policy leak? Evidence from shadow bank lending in EU countries

Abstract

Post the Global Financial Crisis, there has been a surge in the global use of macroprudential policy tools. Concerns have arisen due to the predominant targeting of traditional banks, potentially prompting activity reallocation towards shadow banking. This study scrutinizes the impact of macroprudential policy on shadow bank lending, using quarterly data from 23 European Union countries spanning 1999–2019. Employing a precise measure of non-bank financial intermediation, we find that macroprudential tightening consistently drives increased shadow bank lending. Particularly evident in low-capitalized banking sectors, this implies a strategic credit shift from banks to non-banks. Our results emphasize the need for a balanced regulatory framework for both institutions, illuminating the intricate relationship between macroprudential policies, capitalization levels, and credit dynamics. This insight informs the development of effective regulatory frameworks in the post-crisis financial sector.