11 October 2024

SUERF's Cucic, Gorea: Nonbank Lending and the Transmission of Monetary Policy

Nonbanks have emerged as a primary source of credit for both firms and households, yet the impact of monetary policy on their lending practices is not well understood...evidence that nonbanks increase their credit supply after a monetary contraction, both relative to banks and in absolute terms.

The nonbank credit expansion is driven by long-term debt funding flowing to nonbanks. The attenuation of the traditional bank lending channel of monetary policy has real effects: nonbank credit insulates corporate investment and household consumption from adverse consequences of monetary contractions.

Traditional banks often reduce lending in response to a monetary tightening, a phenomenon known as the bank lending channel of monetary policy (Kashyap and Stein, 1994, and Bernanke and Gertler, 1995). The recent surge in lending by nonbank financial institutions raises questions about how they respond to monetary contractions in terms of lending and how this response impacts the real economy. In this policy brief, we summarize our findings in Cucic and Gorea (2024) where we examine the role of nonbank lenders in the transmission of monetary policy in Denmark, focusing on their impact on corporate investment and household consumption.

Nonbank Lenders Step In

Nonbanks are increasingly a force to reckon with in many credit markets. In Denmark, nonbanks accounted for approximately eight percent of total unsecured credit in both corporate and consumer markets between 2003 and 2018. This share fluctuated, particularly around the 2008 financial crisis, but has shown a general trend of stability in the corporate sector and growth in the consumer sector post-2010. Nonbanks in Denmark include a variety of institutions such as specialized finance companies, wealth managers, and financial leasing companies, each playing significant roles in their respective markets. For instance, specialized finance companies dominate nonbank lending in the corporate credit market, while financial leasing companies are the largest nonbank lenders in the consumer credit market.

The geographical distribution of nonbank lending also shows regional concentrations, with higher shares of nonbank credit in the Danish Capital Region and the Zealand Region. Figure 1 shows how the share of nonbank credit is distributed across Danish municipalities in both the corporate and consumer credit markets. In many local markets, nonbanks account for close to 1/5 of overall unsecured lending.

 

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