The Rise of Nonbanks: Credit Migration and Policy Risks in a Changing Financial System

The May 2025 IMF Working Paper authored by Bruno Albuquerque (University of Coimbra, CeBER), Eugenio Cerutti (IMF), Nanyu Chen (Columbia Business School), and Melih Firat (IMF) delves into the powerful forces reshaping global credit markets. As regulatory and monetary tools have evolved in the post-crisis world, so too has the identity of the institutions supplying corporate credit. The study, which uses syndicated loan data from Dealogic covering 22 lender countries and 153 borrower nations from 2000 to 2019, reveals how macroprudential and monetary policy shocks have inadvertently catalyzed the rise of nonbank financial institutions, ranging from investment banks and private equity firms to pension funds and insurance companies.

The Rise of Nonbanks: A New Credit Powerhouse

Nonbanks now account for nearly 50 percent of global syndicated corporate lending, up from just over 30 percent at the time of the 2008 global financial crisis. Their rapid ascent is especially pronounced in advanced economies such as the United States, the United Kingdom, and Japan. This shift in lending power isn’t merely cosmetic; it reflects profound changes in how firms access credit, particularly during times of policy tightening. The researchers show that nonbanks often step in when traditional banks, burdened by regulatory constraints or monetary shocks, retreat from lending.

The key reason behind this countercyclical behavior lies in the structure of funding. Banks rely heavily on deposits, which become more expensive or less available when interest rates rise, leading to a contraction in credit supply. Nonbanks, less constrained by deposit flows and typically tapping alternative sources like capital markets, can sustain or even increase lending when banks pull back. This dynamic is especially evident during monetary policy tightening, where a one standard deviation shock leads to a 4.6 percent increase in nonbank lending relative to banks.

When Rules Bite: Macroprudential Shocks and the Credit Shift

The study also focuses on macroprudential policy (MaPP) measures, rules aimed at safeguarding financial stability by curbing excessive credit growth. These include credit growth caps, loan-to-deposit ratio limits, and foreign exchange loan restrictions. While such tools are designed to rein in risk, they often do so by tightening banks' balance sheets. The unintended consequence, the researchers find, is that credit migrates from banks to nonbanks, particularly when the former are weakly capitalized or have high non-performing loans.

Nonbanks, less entangled in the net of macroprudential rules, effectively absorb the displaced demand. However, the study points out that while these institutions help cushion the overall credit contraction, the migration of lending to a less regulated domain raises new concerns about financial oversight and potential fragility. In syndicates involving weaker banks, the share of nonbank lending increases significantly during MaPP tightening, by as much as 2.3 percentage points, a statistically and economically meaningful shift.

Lending Relationships Matter, Even Outside Banks

One of the most intriguing insights from the study is that nonbanks also engage in relationship lending. Firms with a prior lending history with a nonbank, defined as borrowing in the previous five years, benefit significantly during contractionary monetary shocks. These borrowers receive between 2.9 to 4.4 percent more credit compared to new clients. This mirrors the traditional understanding of relationship lending in banking, where lenders extend more favorable terms during downturns to long-term clients.

Interestingly, this relationship-based advantage is less clear in the case of macroprudential shocks. Nonbanks do not consistently offer better terms to past clients under regulatory tightening, possibly because these policies don’t affect their balance sheets in the same way. Moreover, relationship borrowers with nonbanks often pay higher spreads than first-time borrowers, suggesting that lenders may be recouping the cost of information and risk by pricing in premiums, while still maintaining access to credit.

Risk and Regulation: A Delicate Balance

While nonbanks have emerged as stabilizers in times of credit stress, the paper does not dismiss the risks they bring. On average, nonbanks are more likely to lend to firms with higher default probabilities and weaker liquidity positions. Although the study finds no evidence that risky firms receive disproportionately more credit during policy shocks, the structural preference of nonbanks for riskier borrowers still poses concerns.

Moreover, banks appear to reallocate lending toward nonbanks during macroprudential tightening. Since nonbanks are treated more favorably under capital regulations like Basel III, especially compared to nonfinancial corporations, this shift appears to be a rational response by capital-constrained banks. However, it raises questions about the interconnectedness between regulated and unregulated financial sectors and whether this behavior inadvertently intensifies systemic risks.

Policy Recommendations: Expand the Regulatory Perimeter

The authors conclude with a strong call for action: regulators must adapt to the realities of a financial system where nonbanks are no longer peripheral players. Extending macroprudential oversight to include nonbanks, through capital requirements, leverage limits, liquidity buffers, and stress testing, would help curb unintended credit leakages, improve the efficacy of monetary policy, and reduce systemic vulnerabilities. Without such measures, tightening policies may merely push risks into the shadows of the financial system, rather than contain them.

This working paper contributes richly to the ongoing debate about how credit is channeled through modern financial systems. As policymakers and regulators seek to balance resilience with growth, the findings underscore a crucial truth: credit doesn’t vanish during stress; it merely moves. And increasingly, it moves toward nonbanks.