Banks, shadow banks, and business cycles

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 12 February 2021

Staff Working Paper No. 907

By Yvan Becard and David Gauthier

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‚ÄĎarea data and find that market sentiment shocks are the main driver of business and financial cycles over the past two decades.

Banks, shadow banks, and business cycles

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