Indirect Credit Supply: How Bank Lending to Private Credit Shapes Monetary Policy Transmission

Sharjil Haque, Young Soo Jang () and Jessie Wang
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Young Soo Jang: https://sites.google.com/view/youngsoojang/home

No 2025-059, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper examines how banks’ financing of nonbank lenders affects monetary policy transmission. Using supervisory bank loan-level data and deal-level private credit data, we document an intermediation chain: Banks lend to Business Development Companies (BDCs)—large private credit providers—which then lend to firms. As monetary tightening restricts bank lending, firms turn to BDCs for credit, prompting BDCs to borrow more from banks. This intermediation chain raises borrowing costs, as banks charge BDCs higher rates, which BDCs pass on to firms. Consistent with this pass-through, bank-reliant BDCs respond more strongly to monetary tightening, and BDC-dependent firms grow more but exhibit weaker interest coverage ratios. Overall, while bank lending to nonbanks mitigates credit contraction and supports investment during tightening, it amplifies monetary transmission by elevating borrowing costs and financial distress risk.

Keywords: Banks and nonbanks; Monetary policy transmission; Business development companies (BDCs); Private credit; Credit chain (search for similar items in EconPapers)
Pages: 82 p.
Date: 2025-08-05
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-59

DOI: 10.17016/FEDS.2025.059

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