What is Different About this Recession? Nonbank Providers of Credit Loom Large

Abstract:     
A key difference between this recession and those of the past is the greatly increased importance of credit extension by entities other than banks – so-called “nonbank credit providers,” or the “shadow banking system.” This article begins by outlining the major reasons credit provision by nonbank entities, as compared to banks, “matters,” and then quantifies the growth in the importance of nonbanks in overall credit provision. The investigation focuses first on the distinction between two major segments of nonbank credit providers: (1) traditional nonbank financial institutions such as insurance companies, pension funds, money market mutual funds and other such entities; and (2) the system of “structured finance” that has arisen around the pooling and securitization of underlying debt obligations. Structured finance, including in particular mortgage-backed securities (MBS) issuance and consumer credit and business credit asset-backed securities (ABS) issuance, has become an integral part of our credit extension system, and the next section of the article moves to an examination of its role over the 2001-2006 boom period, especially in the provision of credit to the household sector. Subsequently, the focus shifts to two crucial developments in structured finance-related credit provision: (1) the precipitous drop in activity across most segments of the structured finance market as the financial crisis unfolded; and (2) the anemic rebound to date of most segments of structured finance. Given the importance of credit provision via structured finance, the ensuing discussion strongly suggests that a moderate recovery, at least, in the contribution of the structured finance part of the “shadow banking system” is essential.

Number of Pages in PDF File: 11

Keywords: Financial Crisis, Nonbanks, Shadow Banking System, Mortgage-Backed Securities, Asset-Backed Securities, Bank Lending

JEL Classification: G2, G20, G21, G28

Accepted Paper Series