Banks, Shadow Banks, and Business Cycles

42 Pages Posted: 16 Feb 2021

See all articles by Yvan Becard

Yvan Becard

Pontifical Catholic University of Rio de Janeiro (PUC-Rio)

David Gauthier

Bank of England

Date Written: February 14, 2021

Abstract

Credit spreads on household and business loans move in lockstep and spike in every recession. We propose a theory as to why banks tighten their lending standards following a drop in market sentiment. The key feature is a procyclical shadow banking sector that shifts risk from traditional banks to investors through securitisation. We fit the model to euro‑area data and find that market sentiment shocks are the main driver of business and financial cycles over the past two decades.

Keywords: Credit spreads, shadow banks, business cycles, financial shocks

JEL Classification: E32, E44, G21, G23

Suggested Citation

Becard, Yvan and Gauthier, David, Banks, Shadow Banks, and Business Cycles (February 14, 2021). Bank of England Working Paper No. 907, Available at SSRN: https://ssrn.com/abstract=3785559 or http://dx.doi.org/10.2139/ssrn.3785559

Yvan Becard (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) ( email )

Rua Marquas de Sao Vicente, 225
Rio De Janeiro, RJ 22453-900
Brazil

David Gauthier

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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