Banks have become much less important in granting credit than they were in the past

Banks are now less important in providing credit than they used to be, because there are a range of operations and financial intermediaries who extend credit throughout the global financial system in an “informal” manner.

This expression is used to classify the group of intermediary companies in the financial sector that do not participate in the traditional banking system. In other words, they are “under” the system, which is why they are called so Shadow banks.

It is known that financial technologies, such as securitization, make it easier for markets to provide more loans, and that more onerous regulations make traditional lending more complex for banks. At the same time, people are investing more and more money in mutual funds rather than bank accounts, a study by the National Bureau of Economic Research, which focuses on the North American market, revealed.

“The traditional model of bank-led financial intermediation, where banks receive deposits from savers and make information-sensitive loans to borrowers, has seen significant decline since the 1970s. Instead, private credit has become increasingly more intermediary through independent transactions, such as bank loans.” .Securitization,” says the new NBER (National Bureau of Economic Research) study.

Increasingly, the “heavy lifting” of the financial system is now being done by capital markets. At least in the USA.

The Financial Times estimates in an article based on a new study conducted by the National Bureau of Economic Research that the market share of American banks in all private loans has fallen by almost half, from 60% in 1970 to 35% last year. The proportion of loans in banks' assets decreased from 70% to 55%. The percentage of household wealth held in deposit accounts decreased from 22% to 13%.

The other side of the coin is the explosion in lending by bond funds and other investment vehicles, often referred to as “shadow banks.”

Although debt securities that are not sensitive to regulatory information – debt securities – are issued by “independent” shadow banks (non-deposit institutions, or shadow banks) and banks.

“Examining how these changes affect the sensitivity of the financial sector to macroprudential regulation, we conclude that although increased capital or liquidity requirements reduce credit granting activity, both in the initial scenario (1960s) and more recently (2020s), The impact is less. “This phenomenon emerged in the subsequent period, due to the decline in the role of credit intermediation in banks’ balance sheets,” the study reveals.

The replacement of banks' balance sheet loans with debt securities explains the very modest decline in lending at all banks, despite the significant contraction in banks' balance sheet loans.

“Overall, we see that the broking sector has undergone a significant transformation, with implications for macroprudential policy and financial regulation,” the study offers.

We document that the weight of private loans on the global balance sheet fell from 60% in 1970 to 35% in 2023, while the weight of savings deposits fell from 22% to 13%. The ratio of loans to bank assets also decreased from 70% to 55%. “We developed a structural model to explore whether technological improvements in securitization, changes in savers' preferences for deposits, and changes in implicit support and costs of banking activities can explain these changes,” says the study co-authored by Greg Boschak, Gregor Matvos, and Tomasz. Piskorski and Amit Siro.

“Banks’ share of global credit – what the study refers to in academia as the ‘share of information-sensitive loans’ – has not declined further since the 2008 financial crisis, despite tighter regulatory controls, and a significant amount of money has remained on deposits,” he adds. : “Despite the meager interest rates.”

But the most interesting aspect of this study is its argument that the radical reshaping of the lending ecosystem over the past few decades means that the banking sector is able to handle more stringent capital requirements without significantly reducing the supply of credit – the biggest argument against such action. .

While the increase in banks' capital requirements leads to a significant reduction in credit on banks' balance sheets, there is at the same time an increase in borrowings through debt securities that replace, albeit imperfectly, loans on the information-sensitive balance sheets of banks, making The study reveals.

“It stands to reason that as loans move from banks to markets, they will become less sensitive to changes in banking regulation. This may explain why the global ratio of bank loans has been stable since 2009, despite the whole Dodd-Frank debate.”

The US bank failure in 2023 has once again highlighted the fundamental issue of banking vulnerability, which has its roots in the high leverage used by banks.

The Financial Times writes that banks' high leverage is largely a byproduct of the safety nets built into insured deposit financing and the ability of banks to issue money as credit.

“The ongoing regulatory discussion, including the final phase of Basel III, aims to address this vulnerability by considering increased capital requirements for banks,” the article adds.

Critics of such proposals express concerns that increasing banks' capital requirements would have significant negative impacts on aggregate credit and the broader economy.

Analysis of the Naber paper This suggests that banks are now less important in providing credit than they used to be. “Our structural model suggests that increased capital requirements for banks will have only modest negative effects on aggregate credit and will primarily lead to a reallocation of credit from banks’ balance sheets to debt securities,” he says.

In this regard, the analysis indicates that banks are now less important in providing credit than they were before.

“Our structural model suggests that increased capital requirements for banks will have only modest negative effects on aggregate credit and will mainly lead to a reallocation of credit from banks’ balance sheets to debt securities,” the analysis highlights.

Of course, this “credit reallocation” process may have downsides, even if the total amount of credit does not change much. “Eliminating banking risks makes this part of the financial system safer, but risks do not disappear. They simply take another form.”