We document three new facts about nonbank lending in the syndicated loan market. First, lending by nonbanks is about three times as cyclical as lending by banks, even after controlling for borrower demand and loan characteristics. Second, the cyclicality of nonbanks - as opposed to bank health - explains the majority of the decline in originations during both the Great Recession and the COVID-19 crisis. Third, we study the main nonbank investors in the market - CLOs and loan mutual funds. Cyclicality in flows to these institutional investors explains cyclicality in nonbank lending. We provide evidence that time-series variation in the benefit from securitization (i.e., the "CLO arbitrage") and fragility in loan mutual fund redemptions contribute to the cyclicality of nonbanks.
Long-term U.S. Treasury yields fell by almost 8% between 1980 and 2017. I document that the entire decline in long-term interest rates was realized in a 3-day window around FOMC meetings. I find a similar pattern for U.S. equities: the same 3-day window can account for the entire decline in equity yields over the same time period. Decomposing the decline into an expected short-rate and a risk premium component, I find that the fall in long-term yields around FOMC meetings can be mostly attributed to a lower expected path for the future short rate. I argue that these results are surprising in light of theories on monetary policy and the secular decline in interest rates.
We make use of Shared National Credit Program (SNC) data to examine syndicated loans in which the lead arranger retains no stake. We find that the lead arranger sells its entire loan share for 27 percent of term loans and 48 percent of Term B loans, typically shortly after syndication. In contrast to existing asymmetric information theories on the role of the lead share, we find that loans that are sold are less likely to become non-performing in the future. This result is robust to several different measures of loan performance and is reflected in subsequent secondary market prices. We explore syndicated loan underwriting risk as an alternative theory that may help explain this result.
We use de-identified data from Facebook to construct a new and publicly available measure of the pairwise social connectedness between 170 countries and 332 European regions. We find that two countries trade more when they are more socially connected, especially for goods where information frictions may be large. The social connections that predict trade in specific products are those between the regions where the product is produced in the exporting country and the regions where it is used in the importing country. Once we control for social connectedness, the estimated effects of geographic distance and country borders on trade decline substantially.