Is bank retrenchment a myth?
The GFC led to the introduction of Basel III, a set of financial reforms aiming to improve banks' abilities to absorb shocks and increase their resilience against potential future crises. The conventional narrative is that the resulting increase in capital requirements led to banks lending much less than before, creating an opportunity for a growing range of non-bank lenders to fill the gap.
Several academic studies have concluded that although capital requirements do play a role, loan growth is closely linked to macroeconomic conditions.1 During the period in the immediate aftermath of the GFC when banks were adjusting their balance sheets, their contribution to overall credit provision reduced.
This was far more acute in Europe, where banks' share of the total credit provided to the non-financial sector fell from 65% in 2009 to 55% in 2015, corresponding to a funding gap of around $2 trillion.2 The reduction was less in the US, which has always been a more disintermediated market.
As the global economy recovered, the supply of bank credit rebounded, supported by ultra-loose monetary policies and stronger demand. However, banks' share of overall credit provision has still not returned to its pre-GFC level.
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