Featured Product

    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. 

     

    Related Links

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

    Related Articles
    News

    EBA Launches Stress Tests for Banks, Issues Other Updates

    The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.

    January 31, 2023 WebPage Regulatory News
    News

    EBA Proposes Standards for IRRBB Reporting Under Basel Framework

    The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.

    January 31, 2023 WebPage Regulatory News
    News

    FED Issues Further Details on Pilot Climate Scenario Analysis Exercise

    The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.

    January 17, 2023 WebPage Regulatory News
    News

    US Agencies Issue Several Regulatory and Reporting Updates

    The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.

    January 04, 2023 WebPage Regulatory News
    News

    ECB Issues Multiple Reports and Regulatory Updates for Banks

    The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.

    January 01, 2023 WebPage Regulatory News
    News

    HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements

    The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.

    December 30, 2022 WebPage Regulatory News
    News

    EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR

    The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.

    December 29, 2022 WebPage Regulatory News
    News

    CBIRC Revises Measures on Corporate Governance Supervision

    The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.

    December 29, 2022 WebPage Regulatory News
    News

    HKMA Publications Address Sustainability Issues in Financial Sector

    The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.

    December 23, 2022 WebPage Regulatory News
    News

    EBA Updates Address Basel and NPL Requirements for Banks

    The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.

    December 22, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8700