The Secular Decline of Bank Balance Sheet Lending

Abstract

This paper examines the decline of the bank balance sheet model of financial intermediation since 1970 and its regulatory implications. The share of private lending on bank balance sheets fell from 55% in the 1970s to 33% in 2023, while the deposit share of savings dropped from 21% to 13%. Loans as a percentage of bank assets also declined from 70% to 55%. We develop a model that captures the interaction between bank balance sheets and originate-to-distribute (OTD) intermediation through securities holdings. Our analysis identifies three key factors driving these trends: a shift in borrower demand toward informationally insensitive lending, a shift in saver demand away from deposits, and evolving regulations affecting bank balance sheets. Regulatory changes and technological advancements primarily drive these shifts. Borrower demand plays a dominant role in reducing balance sheet lending, particularly from the 1970s to the 1990s. Saver demand shifts away from deposits have reduced bank balance sheets but had a smaller impact on overall lending. Bank regulation, especially since the financial crisis, has altered bank balance sheet composition. Simulations of increased capital requirements show that while balance sheets contract in both the 1960s and 2020s, the impact on overall lending is smaller today due to the substitution of bank loans with debt securities. These results suggest the financial sector has become more resilient to regulatory changes, with the decline in bank balance sheet intermediation reshaping the trade-offs faced by macroprudential policies and financial regulation.

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