Abstract: We examine how shadow banks shape the reallocation of real assets at a local level. We first construct a novel county-level panel dataset of all financial institutions—not just banks—from Yellow Pages in Indiana, Michigan, and Ohio from 1920–2000. We document that shadow banks constitute a significant and persistent component of local financial architecture, representing over one-third of financial firms. Using changes in global corn prices as an exogenous shock to the economics of farming, we find that a higher shadow bank share in the local economy significantly enhances asset reallocation in response to economic shocks. In these counties, higher corn prices lead to greater farm consolidation, more efficient use of physical capital, and a larger increase in land values. The benefits come at the expense of higher volatility in land prices in these counties, consistent with an efficiency-volatility trade off. Our paper provides the first granular, long-run evidence that shadow banks play a key complementary role in facilitating asset reallocation.
Discussant: Erica Xuewei Jiang, University of California-Los Angeles
Abstract: Leveraged loans are borne out of an originate-to-distribute lending model that attracts non-bank investors. We argue that differences between banks and non-banks—primarily, the duration of their liabilities—fundamentally alter the transmission of monetary policy through lending. Our analysis shows that leveraged loan spreads are shielded from federal funds rate shocks, especially for tranches held by non-banks. The pass-through pattern is strongest in Term B loans—typically held by nonbank investors—and muted in Term A facilities and revolvers, consistent with the mechanism operating through patient nonbank investors. These impacts are concentrated in loans to financially healthy borrowers (preferred by non-bank investors during tightenings), refuting a "zombie lending" channel in which risky borrowers receive better terms due to forbearance. The effects we identify on spreads are accompanied by expansions in leveraged credit volume and loan maturities, creating aggregate impediments to monetary policy transmission.
Discussant: Friederike Niepmann, Federal Reserve Board of Governors
Kristian Blickle, Federal Reserve Bank of New York
Adair Morse, University of California-Berkeley
Parinitha Sastry, University of Pennsylvania
Abstract: Banks may play a more active role in corporate finance than previously documented. Banks with industry expertise steward firms to undertake value-creating opportunities in transition technologies or expansion (new to the firm) sectors. Bank financing can unlock neglected opportunities, especially when banks have specialization, and firms neglect opportunities because of short-termist discount rates. We set up an empirical two-way fixed effect identification approach, building off the dynamic comparables strategy in the spirit of Sun and Abraham (2021) to test these predictions empirically in U.S. administrative loan data. We leverage detailed regulatory risk measures and granular loan-level industry attribution in supervisory data that covers over 70\% commercial lending. We find that firms are more likely to undertake transition and expansion loans with specialized banks. Furthermore, we show empirically that the effect of stewardship is stronger for short-termist firms, consistent with the idea that such firms would otherwise neglect value-creating opportunities (Kodak moments). We show the results are robust to limiting the sample to firms with similar transition opportunities due to the passage of the Inflation Reduction Act, limiting concerns about dynamic confounders. Consistent with stewardship emerging a consequence of bank specialization (e.g. Paravisini et al. (2023), Blickle et al. (2024)), we document that banks offer lower interest rates for these projects. Active bank stewarding moves the literature beyond the classic view of banks as mere credit providers.
