Lending During Recessions 

Beginning in the fall of 2008, the United States Treasury along with other government agencies 

put in place a series of financial initiatives to help lay the foundation for economic recovery. 

One of these initiatives is the Capital Purchase Program (CPP). Through the CPP, Treasury 

purchased shares of preferred stock from qualifying financial institutions. By strengthening the 

capital bases of financial institutions through the CPP, Treasury aimed to increase CPP 

participants’ capacity to lend to U.S. businesses and consumers and to support the U.S. economy. 

Bank lending tends to be pro-cyclical, contracting with an economic slowdown and rising with 

an expansion, and this has been the case in the current environment. In addition, in the current 

recession, most of the securitization markets have greatly contracted, as has the availability of 

many types of nonbank credit. Thus the CPP, along with other agency actions such as the Term 

Asset Liquidity Fund, and the Temporary Liquidity Guarantee Program, will be critical to 

staving off a greater contraction in the economy. 

A recent question has been whether the broad array of financial stabilization policies put into 

place by the Treasury, the Federal Reserve, and others has led to more lending than would have 

been the case had nothing been implemented. Although it is too early to determine with 

precision the influence of policy on the economy's evolution through the financial crisis, recent 

studies from two leading government agencies released today examine different dimensions of 

lending activity during current and prior recessions. The Federal Reserve Board’s article U.S. 

Credit Cycles Past and Present examines how credit volumes have evolved in the current 

economic downturn relative to previous business cycle downturns using the Federal Reserve’s 

Flow of Funds data. Significant among the Federal Reserve’s findings was that, despite many 

unprecedented aspects of the current financial and economic turbulence, movements in credit 

volumes in the current recession are similar to historical patterns. The evidence shows (1) For 

all categories of lending with the exception of home mortgages, there are at least two other 

downturns that experienced more pronounced declines in lending than that following the 

business cycle peak of 2007:Q4 and (2) Lending over the current downturn does not appear 

especially weak relative to past recessions with the exception of home mortgages. The Federal 

Reserve attributes these findings to the government’s active policy response, particularly with 

respect to the banking sector. The study states “the likely path of the lending in the current 

downturn without any policy response would have been notably more contractionary than after 

1990:Q3.” 

A key difference in this recession compared to past recessions is the greatly increased 

importance of credit extension by non-bank entities, sometimes referred to as the shadow 

banking system. In a study that complements the Federal Reserve’s more general consideration 

of credit market conditions, the article from the Office of the Comptroller of the Currency, What 

is Different about this Recession? Nonbank Providers of Credit Loom Large investigates the 
growth and importance of nonbanks in overall credit provision. Of particular importance in the 

current financial environment are structured finance markets, that is, credit extension based on 

the issuance of mortgage-backed securities (MBS) and consumer-credit and business-credit 

asset-backed securities (ABS). These markets have become an essential component of lending in 

the financial system, particularly for credit extension to households. Key findings in the study 

are: (1) in the MBS market, credit provision supported by government sponsored enterprises’ 

MBS issuance is currently the only meaningful activity, and (2) in non-mortgage consumer credit 

markets, the anemic rebound of ABS issuance leaves a large gap in credit provision to 

households. The article finds that revivals of both the MBS and ABS markets are critical to the 

overall recovery of credit extension to households, and hence economic growth.