Finance and Economics Discussion Series (FEDS)
August 2025
Indirect Credit Supply: How Bank Lending to Private Credit Shapes Monetary Policy Transmission
Sharjil Haque, Young Soo Jang, and Jessie Jiaxu Wang
Abstract:
This paper examines how banks’ financing of nonbank lenders affects monetary policy transmission. Using supervisory bank loan-level data and deal-level private credit data, we document an intermediation chain: Banks lend to Business Development Companies (BDCs)—large private credit providers—which then lend to firms. As monetary tightening restricts bank lending, firms turn to BDCs for credit, prompting BDCs to borrow more from banks. This intermediation chain raises borrowing costs, as banks charge BDCs higher rates, which BDCs pass on to firms. Consistent with this pass-through, bank-reliant BDCs respond more strongly to monetary tightening, and BDC-dependent firms grow more but exhibit weaker interest coverage ratios. Overall, while bank lending to nonbanks mitigates credit contraction and supports investment during tightening, it amplifies monetary transmission by elevating borrowing costs and financial distress risk.
Keywords: Banks and nonbanks; Monetary policy transmission; Business development companies (BDCs); Private credit; Credit chain
DOI: https://doi.org/10.17016/FEDS.2025.059
PDF: Full Paper
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