Bank to non-bank lending and the reallocation of credit

Jian Li, Yiming Ma, Caterina Mendicino and Dominik Supera

No 3220, Working Paper Series from European Central Bank

Abstract: We analyze how bank lending to non-bank financial institutions (NBFIs) affects credit supply to the real economy. Using granular supervisory and loan-level data, we document rapid growth in bank lending to NBFIs relative to lending to non-financial firms. This growth is driven primarily by reverse repos to NBFIs that invest in securities, e.g., investment funds, rather than by loans to NBFIs that extend credit to firms, e.g., private credit funds. We show that the expansion in bank–NBFI lending reflects rising NBFI borrowing demand to fund government securities, which stems in part from the tapering of QE and the expansion of government bond supply in the Euro area, US, UK, and Japan. Importantly, loans to NBFIs disproportionately crowd out loans to non-financial firms rather than securities on bank balance sheets, which ultimately contracts credit supply to the real economy. A model rationalizes our empirical findings and quantifies the aggregate crowding-out effect. Taken together, our results imply that the rise of bank lending to NBFIs represents a narrowing of bank business models and a contraction in bank credit intermediation. JEL Classification: G21, G23, G24, G28, E44, E58

Keywords: bank regulation; banks; financial intermediation; non-bank financial institutions; securities funding (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-cob and nep-fdg
Note: 1774743
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20263220

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