One anecdote sums up Wall Street's hatred for a Fed rule ? and it may prove the point

A bunch of US regulators decided in 2013 that the leveraged lending market was overheating, and that it needed to be curtailed.

Wall Street did not like this one bit.

Leveraged loans are loans to companies rated below investment-grade, and they're often used to finance takeovers.

The regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issued guidelines on everything from underwriting standards to how the risk of these loans should be rated.

The regulators were concerned about the rate of growth in leveraged lending, and what they considered deteriorating underwriting standards. In other words, banks were taking on too much risk.

The guidelines in effect capped loan multiples, putting a stop to some of the more aggressive deals that were taking place at the time. These loans were typically financing private equity acquisitions.

I remember speaking to a very senior Wall Street banker about the guidelines around that time. He was furious.

He told me that when he met with the regulators shortly after the guidelines were published he walked around the room shaking their hands. They found this curious, and asked him why he was doing it.

The reason, he said, was because this was the last time he'd be seeing them. The guidelines these regulators had published meant that either:

a) his job wouldn't exist inside a bank any longer, and so he'd probably be doing the same thing for a hedge fund, or; b) the new rules would have such an impact on lending that economic growth would slow, meaning the regulators would likely be out of a job.

Well, that was then. The market has bedded down with the new rules, and seems to operating just fine. The banker is still employed by the bank. However, it seems he was partially right about one thing.

The Federal Reserve Bank of New York's Liberty Street Economics blog just published some research from staff there, and yes, it seems non-banks did step in to the void left behind by the big banks.

From the post:

Banks overseen by the Large Institution Supervision Coordinating Committee (LISCC)-the institutions that may pose elevated risks to U.S. financial stability-reduced their leveraged lending most aggressively in response to the guidance.

In contrast, nonbanks increased their leveraged lending-even after the first quarter of 2013.

Now, some people might think that is just fine. The risk no longer resides with LISCC banks (a group that includes JPMorgan, Goldman Sachs and Credit Suisse). There was a fair bit of reporting a while back that the likes of Jefferies and Nomura, which don't carry the LISCC designation, were stepping in.

Maybe that is OK, because regulators only care about the banks that are critical to the economy.

The counter-argument is that the risk hasn't been reduced, just moved, and the system is still just as risky.

Here is the Liberty Street Economics post (emphasis ours):

Even though not all lenders have cut their leveraged lending in response to the regulators' guidance it appears that key players, such as LISCC banks, have. This reduction in lending, however, did not necessarily result in an equivalent risk reduction because nonbanks increased their borrowing from banks, possibly to finance their growing leveraged lending activity. This evidence highlights an important challenge of macroprudential policies. Since those policies reach beyond individual banks and target risk in the entire banking system, they are more likely to trigger significant responses that may have unintended consequences.