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Nonbank Lending and Credit Cyclicality

We document three new facts about nonbank lending in the syndicated loan market. First, lending by nonbanks is about three times as cyclical as lending by banks, even after controlling for borrower demand and loan characteristics. Second, the cyclicality of nonbanks - as opposed to bank health - explains the majority of the decline in originations during both the Great Recession and the COVID-19 crisis. Third, we study the main nonbank investors in the market - CLOs and loan mutual funds. Cyclicality in flows to these institutional investors explains cyclicality in nonbank lending. We provide evidence that time-series variation in the benefit from securitization (i.e., the "CLO arbitrage") and fragility in loan mutual fund redemptions contribute to the cyclicality of nonbanks.