How Capital Regulation and Other Factors Drive the Role of Shadow Banking in Funding Short-Term Business Credit

Abstract

This paper analyzes how capital regulation, risk, and other factors altered the relative use of shadow banking system-funded, short-term business debt since the early 1960s. Results indicate that the share was affected over the long run not only by changing information and reserve requirement costs, but also by shifts in relative regulation of bank versus nonbank credit sources — such as Basel I in 1990 and reregulation in 2010. In the short-run, the shadow bank share rose when deposit interest rate ceilings were binding, the economic outlook improved, or risk premia declined, and fell when event risks disrupted financial markets.