Macroprudential Policy and the Revolving Door of Risk: Lessons from Leveraged Lending Guidance

42 Pages Posted: 1 Jun 2017

See all articles by Sooji Kim

Sooji Kim

Federal Reserve Banks - Federal Reserve Bank of New York

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York

João A. C. Santos

Federal Reserve Bank of New York

Date Written: 2017-05-01

Abstract

We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks had more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the issuance of guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.

Keywords: macroprudential regulation, leveraged loans, banks, enforcement, supervision, shadow banking

JEL Classification: G18, G21, G23

Suggested Citation

Kim, Sooji and Plosser, Matthew C. and Santos, João A. C., Macroprudential Policy and the Revolving Door of Risk: Lessons from Leveraged Lending Guidance (2017-05-01). FRB of NY Staff Report No. 815, Available at SSRN: https://ssrn.com/abstract=2978560

Sooji Kim (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

Matthew C. Plosser

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

João A. C. Santos

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)

HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
80
Abstract Views
607
rank
329,576
PlumX Metrics