NBER paper tracks shift to ‘arms-length’ finance

New research explores the forces behind a shift from bank lending towards “arms-length transactions” such as securitisation.

Greg Buchak, Gregor Matvos, Tomasz Piskorski and Amit Seru document a decline in lending and a reduction in deposits with banks since the 1970s. Concurrently, the financial sector has provided a growing share of credit through securities, and savers have increasingly bought these assets.

The authors argue that the view of finance in which banks take in deposits and use their balance sheets to issue loans “forms the backbone of policy decisions”. Regulators use this view of the world to adjust macro-prudential and monetary policy, and to make interventions such as bank bailouts. However, the authors say this model of finance has seen a “dramatic decline”. 

In their working paper, published by the US National Bureau of Economic Research in February, they build a model to explore three key drivers: securitisation technology, savers’ preferences and government interventions.

The authors find that all three had an “important role to play” in the decline of lending, but with different effects.

Changing technology has been the main driver of shifts in aggregate lending. Changes in savers’ preferences are the main force driving a decline in bank balance sheets and falling deposits in the economy. Regulation has driven a shift in how banks deploy their balance sheets, with a declining share of loans as a proportion of total assets.

The authors warn that regulators may make “faulty inferences” if they focus solely on lending and neglect debt markets and securitisation.