Non-bank lending and the transmission of monetary policy

Summary

Focus

The surge in non-bank lending in the past two decades has important implications for monetary policy. Do non-bank lenders respond to a monetary contraction differently than traditional banks? Monetary policy should affect the funding cost of all financial intermediaries who borrow short term, and therefore, non-banks should react similarly to banks to changes in policy. If non-bank lenders are financed differently than banks, they can lessen slightly the effects of tighter monetary policy on firm investment and household consumption.

Contribution

We investigate the role of non-bank lenders in the transmission of monetary policy using data on unsecured loans to Danish firms and households. Since Denmark's currency is pegged to the euro, we use surprises in the European Central Bank's monetary policy as a proxy for Danish monetary policy shocks. This approach helps us isolate the effects of monetary policy from other factors that influence credit supply. We identify the different effects of monetary policy on bank and non-bank financial institutions by focusing on borrowers that receive credit from both lender types each year.

Findings

We find that non-bank lenders respond differently than banks to monetary contractions. While banks reduce lending in response to a monetary tightening, non-banks increase their credit supply and gain market share. Non-banks lend more to borrowers with existing credit relationships. We attribute this increase in non-bank lending to the structure of non-bank funding, particularly their reliance on long-term debt financing and their persistent profitability. We provide evidence that non-banks' profitability remains high even during monetary contractions, unlike that of other banks, thereby rationalizing their inflow of long-term (debt) funding. Moreover, non-banks that fund a larger share of their operations with long-term financing drive the increase in the share of non-bank credit after a monetary contraction. We also show that increased non-bank lending reduces the monetary transmission to real outcomes. Our results hold even in the sample of borrowers with only one lender.

Abstract

We analyze the role of nonbank lenders in the transmission of monetary policy using data on the universe of unsecured credit to firms and households in Denmark. Nonbanks increase their credit supply after a monetary contraction, both relative to banks and in absolute terms. The nonbank credit expansion is driven by long-term debt funding flowing to nonbanks. The attenuation of the traditional bank lending channel of monetary policy has real effects: nonbank credit insulates corporate investment and household consumption from adverse consequences of monetary contractions.

JEL Classification: E51, E52, G23

Keywords: Monetary policy, nonbanks, shadow banks, banks, real effects