The Side Effects of Shadow Banking on Liquidity Provision

57 Pages Posted: 28 Oct 2019

See all articles by Teodora Paligorova

Teodora Paligorova

Board of Governors of the Federal Reserve System

João A. C. Santos

Federal Reserve Bank of New York

Date Written: October 17, 2019

Abstract

Shadow banks had a negligible presence in the US corporate loan market in the 1990s, but by 2016 they funded about 45% of the outstanding corporate term loans. Consistent with banking theories on liquidity provision, shadow banks remained absent from the credit line business. Nonetheless, they had a negative impact on the liquidity insurance provided by credit lines. The arrival of shadow banks increased competition in the term loan business and triggered a substitution of traditional term loans that amortize linearly with bullet loans that are paid at maturity. These changes led to the exit of banks, in particular those with lower risk appetite, not only from term loans but also from credit lines that are part of the deals containing those term loans. As a result, credit line syndicates have become more concentrated and funded by riskier banks, thereby, reducing the liquidity insurance they offer to corporations.

Keywords: shadow banks, term loan and credit line deals

JEL Classification: G21

Suggested Citation

Paligorova, Teodora and Santos, João A. C., The Side Effects of Shadow Banking on Liquidity Provision (October 17, 2019). Available at SSRN: https://ssrn.com/abstract=3471605 or http://dx.doi.org/10.2139/ssrn.3471605

Teodora Paligorova (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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

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