Nonbank Lending and Credit Cyclicality

We show that cyclicality in the syndicated lending market is driven by nonbank lenders. Lending by nonbanks in the syndicated lending market is nearly three times as cyclical as lending by banks, after controlling for loan and borrower characteristics. This cyclicality is explained by nonbanks’ access to financing. In busts, lack of CLO issuances and outflows from mutual funds lead to a drop in primary market originations of syndicated loans; and inflows to nonbanks during booms spur new loan originations. The higher cyclicality is not explained (nor offset) by bank behavior: banks cut originations when nonbank lenders exit the market, irrespective of their characteristics. Our paper brings forth an important reason for the decline in loan originations during both the Great Recession and COVID-19 crisis and highlights that interventions for credit market recovery may require support for nonbank lenders.

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