Non-bank Loans, Corporate Investment and Firm Performance

In the leveraged loan sector, firms borrowing from non-banks have worse profitability and lower investments following loan origination, compared to observably similar firms borrowing from banks; the negative effects are concentrated in the subset of financially-constrained firms. Our results are consistent with the view that non-banks extract rents from borrowers as the lenders of last resort. The leveraged lending guidance, which resulted in the migration of borrowers from banks to non-banks, led to worse outcomes for the leveraged borrowers, complementing our cross-sectional analysis. Our findings suggest that macroprudential policies which exclusively target the traditional banking sector can have negative consequences.