Finance and Economics Discussion Series (FEDS)
October 2020 (Revised June 2025)
Macroprudential Regulation and Lending Standards
R. Matthew Darst, Ehraz Refayet, and Alexandros Vardoulakis
Abstract:
We examine how macroprudential capital requirements interact with competition between banks and non-banks to shape lending standards. Banks have private information and benefit from deposit insurance, while non-banks lack such advantages but are less regulated. We show that higher capital requirements raise banks' incentives to screen, tightening lending standards despite a decline in lender protections at the contract level. Non-bank competition does not erode but rather strengthens aggregate standards by crowding out riskier bank lending. Optimal capital regulation is lower in the presence of non-banks. Our analysis helps rationalize dynamics in leveraged loan and private credit markets.
Keywords: Lending standards, credit cycles, asymmetric information, non-banks, macro-prudential regulation
DOI: https://doi.org/10.17016/FEDS.2020.086r1
PDF: Full Paper
Original Paper: PDF | Accessible materials (.zip)
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