Has monetary policy fueled the rise in shadow banking?

Asymmetric effects of monetary policy on non-bank financial intermediation (NBFI) assets: a panel quantile regression approach

“…Similarly, Apostoaie and Bilan (2020) find that expansionary MP shock in Central and Eastern Europe motivates investors to seek more attractive returns in riskier places, as in the NBFI sector. Hodula (2019) supports the “search for yield” effect by mentioning that persistently low-interest rates are the motivating factor behind NBFI assets for the euro area after the post-crisis monetary easing. However, he also found that in the Global Financial Crisis (GFC) run-up, MP tightening reduced the growth of traditional banks and led to an expansion of NBFI activities confirming the “waterbed” effect.…”

“…This shows at the middle and higher levels of NBFI assets, there is a “search for yield” effect. Under a long-lasting accommodative MP, lower yields are the key factor behind investors' motivation to look for more profitable investments (IMF, 2014; Kim, 2017; Hodula, 2019; Giuzio et al ., 2021; Apostoaie and Bilan, 2020). Economic actors may engage in excessive risk-taking by substituting away from safe bank deposits for NBFI products.…”

“…However, he also found that in the Global Financial Crisis (GFC) run-up, MP tightening reduced the growth of traditional banks and led to an expansion of NBFI activities confirming the “waterbed” effect. In line with Hodula (2019), IMF (2014) argues that the growth rate of NBFI is affected by the “search for yield” effect after GFC. However, Hodula et al .…”

“…In response to a MP contraction, NBFI entities also intensify securitization activities to circumvent the challenge posed by the liquidity dry-up (Agnello et al ., 2020). Furthermore, a hike in interest rates raises the cost of repaying existing loan contracts, perhaps motivating economic actors to refinance bank loans in the shadows (Hodula, 2019). In a nutshell, the bank lending channel is weakened when the response of NBFI credit offsets the response of aggregate bank loans.…”

“…Lower yields due to low-interest rates are the critical factors behind investors' motivation to look for more profitable investments. In other words, under a long-lasting accommodative MP, investors may engage in excessive risk-taking and underprice risk if they buy higher-yielding assets regardless of their risk profile (Hodula, 2019). As such, following an expansionary MP shock, due to the “search for yield” effect, investors may substitute away from safe bank deposits for NBFI products (Giuzio et al ., 2021).…”