Fragile Financing? How Corporate Reliance on Shadow Banking Affects their Access to Bank Liquidity

In the last twenty years, assets managed by nonbank financial institutions—commonly referred to as "shadow banks"—have grown significantly, a trend documented extensively in studies such as Acharya et al. (2024a). Concurrently, large corporations increasingly rely on funding from nonbank sources. As illustrated in Figure 1, nonbank-originated term loans have predominantly exceeded bank-originated loans from the first quarter of 2000 through the first quarter of 2022. Importantly, the firms obtaining financing from nonbanks are substantial in size and economically significant, surpassing those reliant solely on traditional bank financing. This underscores the rising prominence of nonbank lending as an essential source of corporate finance.

Figure 1. Growth of nonbank lending

However, nonbank lending is characterized by a lack of stable and insured deposit base as well as government backstops introducing rollover risk into a firm's capital structure (Fleckenstein et al., 2023). As a result, in periods of market stress (as we have observed during the global financial crisis of 2008-2009, the 2014–16 oil price collapse and the COVID-19 recession), firms that rely on nonbanks may have to turn elsewhere for funding. In times of market-wide stress, banks may experience a shift in credit allocation to firms from nonbanks to their own balance sheets via credit line drawdowns, potentially raising liquidity and capital encumbrance (Acharya et al. (2024b)).

In Acharya et al. (2025), we ask how the increase in nonbank funding dependence of firms has altered the provision of liquidity insurance by banks to non-financial firms. Do banks, in their role as liquidity providers, take into account the financing sources of borrowers when making lending decisions? Banks might decide against extending credit lines to borrowers dependent on nonbank financing, which amplifies financial stress to nonbank borrowers. Documenting empirically that reliance on nonbank funding is indeed associated with such fragility for borrowers is the key contribution of our paper.

We focus on syndicated loan originations to large, nonfinancial corporations—a market exceeding $2.9 trillion in outstanding volume as of 2022 ($5.9 trillion including credit lines). Figure 2 shows the cyclicality and fragility of nonbank supply during periods of aggregate stress, which usually exceeds 60% of total borrowing.

Figure 2. Nonbank dependence

We first document a negative relationship between a firm's nonbank dependence and its credit line access (Figure 3), defined as the share of bank revolvers in a firm’s total liquidity (cash plus credit lines), as in, for example, Sufi (2009). Borrowers with greater nonbank exposure are also associated with more expensive credit lines as well as stricter non-price terms (such as covenants).

Figure 3. Volume of credit lines vs. nonbank dependence

We then focus on the 2014–16 oil price collapse, a severe, unexpected decline of about 70% -- as a plausibly exogenous shock to the rollover risk of nonbank financing for non-oil-sector firms. Declining stock and loan prices of oil and gas firms led to a significant drop in CLO issuance, given CLO managers' heavy exposure to these sectors. Post-global financial crisis, around 86% of leveraged loans were held by institutional investors, with CLOs, mutual, or hedge funds accounting for about 96% of that segment (Saunders et al. (2024)).  Consequently, issuance of nonbank term loans (TLB tranches) fell as well. Importantly, these effects did not reflect broader economic distress or pose a notable risk to banking stability.

Importantly, some CLOs nearing covenant breaches had to sell loans of firms unaffected by the oil-price shock ("innocent bystanders," as termed by Kundu (2023)). We examine credit outcomes for these borrowers, isolating the impact of CLO managers' exposure rather than borrower fundamentals. Further, we categorize firms by rollover risk, focusing on those facing imminent TLB maturities and thus vulnerable to sudden nonbank funding withdrawals and rollover risk. This scenario allows us to test bank responses when nonbank lenders exit for exogenous reasons.

Figure 4 shows that bank credit lines increased for firms whose nonbank funding declined—but only if they did not require immediate refinancing. Bank lenders likely anticipated a reduced future reliance on nonbank funding and were therefore willing to expand their liquidity provision to these firms. Conversely, banks reduced liquidity provision to firms with immediate refinancing needs from nonbanks (and whose nonbank funding declined too). Before the oil-price shock, changes in credit line lending to both groups of firms hovered around zero, reinforcing the argument that the shock triggered a divergence in bank credit line lending between firms with maturing and non-maturing nonbank term loans.

Figure 4. Borrower term loans and credit line access

Our findings indicate that firms with maturing nonbank term loans experienced not only a sharp decline in nonbank lending but also a significant reduction in bank credit line originations and higher borrowing costs—a “double whammy“ effect. This raises an important question: how did these firms continue to manage their liquidity? We show that they responded by substantially increasing their credit line utilization during the oil-price shock period. This also had notable implications for their investment decisions, as we observe a significant reduction in both assets and capital expenditures. At the same time, their cash holdings and the proportion of cash relative to total liquidity remained unchanged, supporting the interpretation that these firms were rendered financially constrained and sought to preserve cash.

Collectively, our evidence suggests that heavy reliance on nonbanks increases borrower fragility to nonbank financing shocks and constraints their access to bank-provided liquidity. This dynamics underscores the fragility of financing associated with the expanding role of nonbank lending in corporate finance.

Read the full paper here.

References

Acharya, V. V., Cetorelli, N., Tuckman, B., 2024a. Where do banks end and nbfis begin? NBER Working Paper .

Acharya, V. V., Engle, R., Jager, M., Steffen, S., 2024b. Why did bank stocks crash during covid-19? Review of Financial Studies Vol. 37 (9), 2627–2684.

Acharya, V. V., Gopal, M., Steffen, S., 2025. Fragile Financing? How Corporate Reliance on Shadow Banking Affects their Access to Bank Liquidity. Working Paper.

Fleckenstein, Q., Gopal, M., Gutierrez, G., Hillenbrand, S., 2024. Nonbank Lending and Credit Cyclicality. Review of Financial Studies, forthcoming.

Kundu, S., 2023. The externalities of fire sales: Evidence from collateralized loan obligations. Working Paper.

Saunders, A., Spina, A., Steffen, S., Streitz, D., 2024. Corporate loan spreads and economic activity. Review of Financial Studies 38, 507–546.

Sufi, A., 2009. Bank lines of credit in corporate finance: An empirical analysis. Review of Financial Studies 22, 1057–1088.