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Macroprudential policy and the revolving door of risk: Lessons from leveraged lending guidance

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  • Kim, Sooji
  • Plosser, Matthew C.
  • Santos, João A.C.

Abstract

We investigate the U.S. experience with macroprudential policies by studying the interagency guidance on leveraged lending. We find that the guidance primarily impacted large, closely supervised banks, but only after supervisors issued important clarifications. It also triggered a migration of leveraged lending to nonbanks. While we do not find that nonbanks use more lax lending policies than banks, we unveil important evidence that nonbanks increased bank borrowing following the guidance, possibly to finance their growing leveraged lending. The guidance was effective at reducing banks’ leveraged lending activity, but it is less clear whether it accomplished its broader goal of reducing the risk that these loans pose for the stability of the financial system. Our findings highlight the importance of supervisory monitoring for macroprudential policy goals, and the challenge that the revolving door of risk poses to the effectiveness of macroprudential regulations.

Suggested Citation

  • Kim, Sooji & Plosser, Matthew C. & Santos, João A.C., 2018. "Macroprudential policy and the revolving door of risk: Lessons from leveraged lending guidance," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 17-31.
  • Handle: RePEc:eee:jfinin:v:34:y:2018:i:c:p:17-31
    DOI: 10.1016/j.jfi.2018.01.011
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    Citations

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    Cited by:

    1. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    2. Stefanie Behncke, 2020. "Effects of macroprudential policies on bank lending and credit risks," Working Papers 2020-06, Swiss National Bank.
    3. Beverly Hirtle, 2020. "Banking Supervision: The Perspective from Economics," Staff Reports 952, Federal Reserve Bank of New York.
    4. Rustom M. Irani & Rajkamal Iyer & Ralf R. Meisenzahl & José-Luis Peydró, 2018. "The rise of shadow banking: evidence from capital regulation," Economics Working Papers 1652, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2020.
    5. Calem, Paul & Correa, Ricardo & Lee, Seung Jung, 2020. "Prudential policies and their impact on credit in the United States," Journal of Financial Intermediation, Elsevier, vol. 42(C).
    6. Esti Kemp & Rene van Stralen & Alexandros Vardoulakis & Peter J. Wierts, 2018. "The Non-Bank Credit Cycle," Finance and Economics Discussion Series 2018-076, Board of Governors of the Federal Reserve System (U.S.).
    7. Janko Cizel & Jon Frost & Aerdt Houben & Peter Wierts, 2019. "Effective Macroprudential Policy: Cross‐Sector Substitution from Price and Quantity Measures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1209-1235, August.
    8. Sergey Chernenko & Isil Erel & Robert Prilmeier, 2019. "Why Do Firms Borrow Directly from Nonbanks?," NBER Working Papers 26458, National Bureau of Economic Research, Inc.
    9. Xing Zhang & Fengchao Li & Zhen Li & Yingying Xu, 2018. "Macroprudential Policy, Credit Cycle, and Bank Risk-Taking," Sustainability, MDPI, Open Access Journal, vol. 10(10), pages 1-18, October.
    10. Nitzan Tzur-Ilan, 2019. "Macroprudential Policy: Implementation, Effects, And Lessons," Israel Economic Review, Bank of Israel, vol. 17(1), pages 39-71.

    More about this item

    Keywords

    Macroprudential regulation; Leveraged loans; Banks; Enforcement; Supervision; Shadow banking;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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