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    BIS Paper Examines Impact of Direct Lending on Policy Mechanism

    November 22, 2021

    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. 


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    Keywords: International, Banking, Fintech, Regtech, Lending, Loan Origination, Non-Bank Financial Intermediaries, Credit Risk, BIS

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