Abstract
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 and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.
Highlights
We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks in the U.S corporate loan market
We base our empirical tests on data from the Shared National Credit Program, which is a supervisory credit register administered by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency
The discrepancies found in the U.S rule were largely unanticipated and created “winners” and “losers,” whereby the losers faced unexpected shortfalls in regulatory capital following the announcement. This holds even among banks with similar risk profiles ex ante, for example, regulatory capital ratios under Basel I. While this setting is restricted to a narrow window, it provides variation in bank capital that is orthogonal to characteristics related to commercial lending activity—including risk within the syndicated loan portfolio— that might otherwise drive loan retention
Summary
Our primary data source is the Shared National Credit Program (SNC). The SNC is a credit register of syndicated loans maintained by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, and, before 2011, the now-defunct Office of Thrift Supervision. Through surveys of administrative agent banks, the program collects confidential information on all loan commitments larger than $20 million and shared by three or more unaffiliated federally supervised institutions, or a portion of which is sold to two or more such institutions This includes loan packages containing two or more facilities (e.g., a term loan and a line of credit) issued by a borrower on the same date where the sum exceeds $20 million. We exclude loan-years for which the credit identifier does not change, but we do observe some change in the maturity date, origination date, or total loan amount at origination, since such changes are associated with refinancing or amendment of an existing loan This “No Amend” sample allows us to address the identification concern that borrowers may remove underperforming banks from the syndicate, assuming it is easier to do so when the contract is up for renegotiation. These loan price proxies allow us to estimate the association between nonbank participation in loan syndicates and price declines during the 2008 aggregate shock
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