Credit Commitments by Nonbanks
Publication Date
5-28-2026
Abstract
Despite the secular shift to nonbank lending, banks retain a distinctive advantage in providing credit lines (Kashyap, Rajan, and Stein, 2002). We document a new pattern in nonbank lending: business development companies (BDCs) extend substantial credit commitments to borrowers, with commitment-to-asset ratios comparable to those of banks. These off-balance-sheet commitments are concentrated, exposing BDCs to undiversified borrower liquidity shocks---a risk they manage with credit lines provided by banks. We develop a model of layered liquidity insurance along the credit chain: the BDC pools its portfolio firms to partially diversify idiosyncratic shocks and uses a bank credit line to backstop residual liquidity risk. In equilibrium, the nonbank optimally provides only partial liquidity insurance, which generates a novel externality whereby firms sharing the constrained liquidity pool inefficiently underinvest in liquidity management.
Document Type
Article
Keywords
private credit, business development companies (BDCs), credit lines, liquidity insurance
Disciplines
Finance
Source
SMU Cox: Finance (Topic)
Language
English
