Non-bank lending in times of crisis

Following the Great Financial Crisis that occurred between 2007 and 2009, non-bank financial institutions have been gradually expanding their presence across the world. They currently make up around half of all the assets in the global financial system. Current research on the effect that non-bank financial institutions have on the effectiveness of monetary policy highlights the significance of the funding mechanisms that these institutions use. Much less is understood about the behaviour of global non-bank lending during times of crisis, as well as whether or not borrowers can profit from ties with non-banks.

Non-bank lending across countries by using data from the worldwide syndicated loan market. This evidence focuses on lending activity during times of financial crises. The previous body of research has shed light on the significant role that lending relationships with banks play in easing the credit constraints that borrowers face during times of crisis. Lending relationships play in determining the nature of non-bank lending.

Even after taking into account the fact that lender and borrower characteristics change over time, we find that non-banks reduce the amount of syndicated loans they offer by a significant amount more than banks do during times of crisis. According to the results of further research, disparities in the value of lending connections appear to account for the majority of the lending disparity. It is to the advantage of borrowers to have a lending relationship with a bank; but partnerships with non-banks do not help borrowers' access to credit during times of economic crisis, regardless of how long or how intense the relationship is. As a result, the expansion of non-bank financial institutions could make the effects of the financial crisis worse because this development results in a shift away from relationship lending and towards transaction lending.

The proliferation of non-bank financial institutions might consequently bring about a shift away from relationship lending in favour of transaction lending, which would intensify the effects of financial crises.