Nonbank Lending and Credit Cyclicality

56 Pages Posted: 18 Jun 2020 Last revised: 16 Nov 2020

See all articles by Quirin Fleckenstein

Quirin Fleckenstein

New York University (NYU) - Leonard N. Stern School of Business

Manasa Gopal

Georgia Institute of Technology - Scheller College of Business

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students

Sebastian Hillenbrand

New York University (NYU) - Leonard N. Stern School of Business

Date Written: June 17, 2020

Abstract

We document three new facts about nonbank lending in the syndicated loan market. First, lending by nonbanks is about three times as cyclical as lending by banks, even after controlling for borrower demand and loan characteristics. Second, the cyclicality of nonbanks - as opposed to bank health - explains the majority of the decline in originations during both the Great Recession and the COVID-19 crisis. Third, we study the main nonbank investors in the market - CLOs and loan mutual funds. Cyclicality in flows to these institutional investors explains cyclicality in nonbank lending. We provide evidence that time-series variation in the benefit from securitization (i.e., the "CLO arbitrage") and fragility in loan mutual fund redemptions contribute to the cyclicality of nonbanks.

Keywords: Nonbanks, credit cyclicality, CLOs, mutual funds, leveraged lending, COVID-19, Great Recession

JEL Classification: G21, G23, E32, E44, G01

Suggested Citation

Fleckenstein, Quirin and Gopal, Manasa and Gutierrez Gallardo, German and Hillenbrand, Sebastian, Nonbank Lending and Credit Cyclicality (June 17, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3629232 or http://dx.doi.org/10.2139/ssrn.3629232

Quirin Fleckenstein

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Manasa Gopal (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://https://manasagopal.com/

German Gutierrez Gallardo

New York University (NYU) - Leonard N. Stern School of Business, Students ( email )

NY
United States

Sebastian Hillenbrand

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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