Published online by Cambridge University Press: 01 April 2024
Nonbank lenders have been playing an increasing role in supplying debt, especially after the Great Recession. How important are the distortions in the greater regulation of banks that differentially limit risk-taking across alternative providers of credit? How might the growing role of nonbanks in credit markets affect financial stability? This selective review addresses these questions and discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock. We argue that tighter bank regulation has created incentives for nonbanks to increase their participation in credit markets, a trend that creates concerns about financial stability.
This article was prepared for the Federal Reserve Bank of Boston’s 65th Economic Conference, “The Implications of High Leverage for Financial Instability Risk, Real Economic Activity, and Appropriate Policy Responses.” We would like to thank Ran Duchin (the editor), Victoria Ivashina (discussant), and Philip Strahan (the referee) for their very helpful comments. All errors are our own.