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Banks, shadow banks, and business cycles

Author

Listed:
  • Becard, Yvan

    (PUC-Rio)

  • Gauthier, David

    (Bank of England)

Abstract
Credit spreads on household and business loans move in lockstep and spike in every recession. We propose a theory as to why banks tighten their lending standards following a drop in market sentiment. The key feature is a procyclical shadow banking sector that shifts risk from traditional banks to investors through securitisation. We fit the model to euro‑area data and find that market sentiment shocks are the main driver of business and financial cycles over the past two decades.

Suggested Citation

  • Becard, Yvan & Gauthier, David, 2021. "Banks, shadow banks, and business cycles," Bank of England working papers 907, Bank of England.
    • Handle: RePEc:boe:boeewp:0907
    as

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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2021/banks-shadow-banks-and-business-cycles.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit spreads; shadow banks; business cycles; financial shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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