Dampening the financial accelerator? Direct lenders and monetary policy

(November 2021, revised September 2023)

Summary

Focus

Ranging from business development companies to insurance companies, direct lenders have become increasingly active in corporate loan markets. We investigate the role that these non-bank credit intermediaries play in the monetary policy transmission mechanism. As direct lenders become more prominent, their response to monetary policy will have a growing influence on how monetary policy affects the real economy.

Contribution

Lending by direct lenders seems to respond less sensitively to monetary policy than bank lending does in the syndicated loan market. We ask if this reflects a weaker influence from either the bank lending channel or the financial accelerator channel of monetary policy. Differences in leverage, maturity mismatch and lending technology all suggest that monetary policy may have an influence on direct lending that differs from its more widely studied effects on banks.

Findings

We find that direct lenders are more likely to join syndicates when monetary policy announcements trigger a decline in the aggregate stock market valuation of firms. This occurs whether short-term interest rates rise or fall. This suggests that direct lenders smooth the financial accelerator channel but not the bank lending channel of monetary policy. We conclude that this could reflect the low leverage of direct lenders, or differences in their lending technology. Either or both of these factors would let them keep on lending to firms when corporate sector net worth worsens, just as banks start cutting back.

Abstract

Direct lenders, non-bank credit intermediaries with low leverage, have become increasingly important players in corporate loan markets. In this paper we investigate the role they play in the monetary policy transmission mechanism, using syndicated loan data covering the 2000-2018 period. We show that direct lenders are more likely to join loan syndicates whenever monetary policy announcements trigger a contraction in borrowers' net worth irrespective of the directional change in interest rates. Thus, our findings suggest that direct lenders dampen the financial accelerator channel of monetary policy.

Keywords: direct lending, monetary policy, financial accelerator, credit channel.

JEL classification: G21, G32, F32, F34.