The Bank for International Settlements (BIS) published a paper that investigates the role that direct lenders or non-bank credit intermediaries play in the monetary policy transmission mechanism. The paper explores whether lending by direct lenders is less sensitive to monetary policy and whether this relates to the weaker influence of the bank lending and financial accelerator channels. The study presented in the paper classifies direct lenders as the subset of non-bank financial intermediaries engaged in primary market loan origination that are neither subject to bank regulation nor similar supervisory oversight. The paper notes that direct lenders have become increasingly important players in corporate loan markets and claims to add to the literature on direct lenders and how they differ from banks.
The paper notes that previous research has analyzed the type of borrowers catered for by direct lenders, finding that they specialize in lending to risky firms; this greater risk appetite could relate to regulatory factors and to direct lenders’ lending technology that relies on ex-ante screening. The study finds that direct lenders do not smooth the impact of monetary policy through the bank lending channel, rather they appear to smooth the impact of the financial accelerator channel of monetary policy. Direct lenders step in to syndicates when monetary policy announcements are associated with a fall in equity prices, irrespective of the directional impact of these announcements on interest rates. This could reflect their low leverage or differences in their lending technology. Both of which may allow them to keep on lending to firms when net worth worsens, just as banks step back. In this sense, direct lenders are akin to other sources of non-bank credit which operate with low leverage. Differences in leverage, maturity mismatch, and lending technology all suggest that monetary policy may have an influence on direct lending that differs from its more widely studied effects on banks. One implication of this analysis is that direct lenders can dampen financial accelerator mechanisms in the economy, should they keep on growing at a rapid pace. Another implication is that the growing presence of direct lenders increases the ability of borrowers to substitute between bank versus non-bank credit as risk increases. This could enhance the robustness of the syndicated loan market, but only if direct lender leverage remains low.
Keywords: International, Banking, Fintech, Regtech, Lending, Loan Origination, Non-Bank Financial Intermediaries, Credit Risk, BIS
Previous ArticleEU Issues SII Corrigendum; EIOPA Assesses SII Reporting Exemptions
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.
The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.
The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.
The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.