What is different about this recession? Nonbank providers of credit loom large 

Daniel E. Nolle 

Senior Financial Economist 

Office of the Comptroller of the Currency 

Introduction 

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. 

Nonbank Providers of Credit: Why Are They Important? 

Banks are a special class of financial intermediaries whose deposit-taking and credit 

extension activities traditionally have been subject to relatively more intensive regulatory 

oversight than other financial service providers. The banking system is a major 

component of the credit provision system; nevertheless, there is growing awareness that 

other entities also play a significant role in credit provision. Perhaps less well-known are 

1) why, conceptually, “nonbanks” are important, and 2) the size and nature of nonbank 

credit provision for the economy. A basic understanding of both of these points is an 

essential pre-requisite for a meaningful discussion of public policy choices addressing 

both the current financial turmoil, and the future financial landscape. 

Nonbank providers of credit – sometimes referred to as “the shadow banking system” – 

matter for at least three reasons. First, this segment of providers is far larger now than in 

the past, including as compared to all previous recessions. A critical corollary, as 

illustrated below, is that the share of credit provided by the banking system is relatively 

smaller than ever before. Second, regulation and supervision are generally less stringent 
for this segment than for the banking system; and, broadly speaking, regulation for 

nonbanks focuses relatively more on investor/customer protection than on institution and 

system-wide safety and soundness, as is the case for banking. Third, from a crisismanagement point of view, the ability of governmental authorities to influence or 

intervene in the shadow banking system is more limited in scope than it is for the banking 

industry. Monetary policy instruments are used to address financial crises, and these tend 

to rely on the banking system for effect (although note that open market operations 

operate through primary dealers, not all of whom are banks). In addition, the regulatory 

framework provides various tools for regulators to influence banks directly, using both 

formal methods (such as enforcement actions) and informal methods based on ongoing 

supervisory activities. Each of these shadow banking system facets presents special 

challenges for public policy, and complicates policy responses in times of financial stress. 

Nonbank Providers of Credit: How Important Are They? 

The Federal Reserve’s Flow of Funds categorizes credit providers by type, and offers a 

comprehensive picture of credit flows and outstanding balances over time. Financial 

sector credit providers can be divided into three broad groups: (1) “Banks,” composed of 

broadly similar depository institutions (operating under similar regulatory regimes) 

including commercial banks, bank holding companies, thrifts, and credit unions; (2) 

nonbanks providing credit via “structured finance” (i.e., mortgage-backed securities and 

other asset-backed securities); and (3) “All Other” nonbank credit providers. There is no 

single definition of the “shadow banking system,” but one way to think of it is as the 

combination of the latter two groups.1

Figure 1 uses Flow of Funds data to illustrate trends in the shares of outstanding balances 

of debt held by – or credit extended by – each of these three broad groups, going back 

almost four decades.2

 Two trends are particularly striking. First, the share of credit 

extended by banks was halved over the period, declining from over 60 percent in 1970 to 

about 30 percent by the end of 2008.3 Second, for nonbank credit providers, structured 

 

1

 This is probably as broad a definition of the “shadow banking system” as any; some would argue that 

within the structured finance sector, the GSEs should be excluded from the definition because traditionally 

they have been subject to regulatory oversight similar in concept to banking system-oriented regulation. 

2

 Specifically, Figure 1 shows credit market assets held by components of the financial sector. The 

financial sector traditionally holds about three-fourths of all credit market assets, which together 

correspond to credit market debt owed across the economy. The two other sectors holding credit market 

assets are domestic nonfinancial providers and foreigners. This analysis focuses exclusively on credit 

provision by financial sector entities and therefore does not consider nonfinancial and foreign providers of 

credit. 

 

3

 It is important to understand that in the Flow of Funds data (as illustrated in Figures 1, 2, and 3) debt held 

by (and credit extended by) banks (and bank holding companies, thrifts, and credit unions) includes only 

assets held on their balance sheets. Such assets include whole loans held in banks’ loan portfolios, as well 

as various securities held in banks’ investment portfolios that support credit extension. In particular, banks 

invest in mortgage-backed securities (“MBS”) and other asset-backed securities (“ABS”) where the 

underlying collateral, such as mortgage loans or credit card loans for example, have been pooled and 

packaged into securities, as described below. 

2
finance greatly increased in relative importance, growing from 4 percent of credit 

provision in 1970 to over 30 percent by the end of 2008. Indeed, the growth in the 

relative importance of structured finance was largely at the expense of the banking 

sector’s on-balance sheet share of credit provision, and by 2008 – as the current financial 

crisis blossomed – all three major groups of credit providers had approximately the same 

relative importance across the economy. 

 

Figure 1. Credit Provision to the U.S. Economy:

Banks Have Become Less Important and Nonbanks Have Become More Important

[Excludes Credit Market Assets Held by Federal Reserve] 

Banks

Non-Bank Credit Providers:

Structured Finance

All Other Non-Bank Credit 

Providers

0%

20%

40%

60%

80%

100%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Percent of Total Credit Market 

Assets Held by Financial Sector

Credit Providers

Source: Flow of Funds, Federal Reserve System; Haver Analytics.

Figure 2 provides more detail on the major players within each broad group. Traditional 

entities, including insurance companies and pension funds continue to play significant 

roles, although over time each lost share as money market mutual funds grew in 

importance.4

 GSEs (government-sponsored enterprises, including Fannie Mae, Freddie 

Mac, Ginnie Mae, and the Federal Home Loan Banks) accounted for about two-thirds of 

all structured finance, with other mortgage and non-mortgage asset-backed securities 

issuers accounting for the remainder.5

 

4

 Other entities in this category include finance companies, brokers and dealers, funding corporations, 

mutual funds, close-end funds, exchange-traded funds, and REITs. 

5

 These include “private label” or “non-agency” MBS issuers (who focused on securitizing subprime, AltA, and jumbo mortgages), and issuers of consumer credit and business credit asset-backed securities, 

including such components as credit card receivables, auto loans, and commercial real estate loans. 

3
Figure 2. Shifting Shares of Major Non-Bank Players in Credit Provision

[Excludes Credit Market Assets Held by Federal Reserve]

Banks

(Commercial Banks, Bank Holding 

Cos., Thrifts, Credit Unions)

Government Sponsored 

Enterprises

"Private Label" MBS Issuers, and 

Consumer Credit & Business 

Credit

ABS Issuers

Pension Funds

Insurance Cos.

Money Market

Mutual Funds

Other Credit Providers

0%

20%

40%

60%

80%

100%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Percent of Total Credit Market 

Assets Held by Financial Sector

Credit Providers

Source: Flow of Funds, Federal Reserve System; Haver Analytics.

Structured Finance: Some Basics 

“Structured finance” or “securitization” of economic assets such as mortgages, credit card 

loans, and auto loans is a financial innovation that first reached widespread use in the 

mortgage market in the 1970s. Two broad categories include mortgage-backed securities 

(“MBS”) and (non-mortgage) asset-backed securities (“ABS”).6 The process of 

constructing these products is, generally speaking, as follows. Banks and other financial 

institutions originate credit such as home mortgage loans. The banks and financial 

institutions then group, or “pool,” a large number of these loans together and sell the pool 

to an entity whose sole function is to buy, and subsequently re-sell, such pools of loans; 

one common term for such entities is a “special-purpose vehicle” or SPV.7

 A trust 

purchases the pools from the SPV and then repackages the pools of loans as interestbearing securities, which it then “issues” or sells as mortgage- or asset-backed 

instruments into the marketplace. For non-mortgage ABS created by nonbanks, the trust 

generally works with investment banks that underwrite the sales. For a large part of the 

mortgage market, Freddie Mac, Fannie Mae, and other GSEs are the issuers of mortgage-

 

6

 This distinction is conventional, although some data sources and market observers use the term “ABS” in 

a generic sense to cover both (non-GSE) mortgage-backed and non-mortgage-backed securitizations. See, 

e.g., the Federal Reserve’s Flow of Funds usage. 

7

 The SPV “step” in the process results in bankruptcy remoteness for the trust, or actual issuer of the ABS, 

from any subsequent bankruptcy of the originating institution. 

4
backed securities. Initial investors purchasing these securities can, in turn, resell them in 

the secondary market.8

The benefits of the pooling and securitization process are substantial and as a 

consequence structured finance has become a key component of the financial landscape. 

These benefits include the ability of banks, in particular, to facilitate the extension of a 

greater amount of credit than they otherwise could, were they to hold all the loans they 

originate on their balance sheets. By selling loans, banks do not have to hold capital 

against those loans or fund them, and can therefore re-deploy their capital and funding in 

support of additional credit extension.9 In addition, the pooling process can result in a 

diversification of risk, by, for example, developing securitized assets backed by loans 

from different geographic regions and industries. 

The problems that plagued the structured finance markets have been well-documented. 

Those included poorly structured deals; miscalculated creditworthiness ratings, by all the 

major ratings agencies, as they underestimated the correlation of defaults across pools of 

assets (particularly in CDOs, CDOs-squared, CDOs-cubed, etc.); an apparent overreliance on those ratings by investors and regulators; and an over-emphasis on the part of 

some originators on fee-generation without sufficient consideration of a borrower’s 

ability to repay. Nevertheless, it is important to note that these problems are not inherent 

defects of the securitization process. 

Credit Provision to Households: Banks vs. Structured Finance 

The expanding role of structured finance relative to bank lending has been a big story in 

credit extension for the economy as a whole, as Figures 1 and 2 make clear, but for credit 

extension to households, it has been the story. That is especially true in the home 

mortgage market, as Figure 3 illustrates. In particular, the huge increase in the share of 

home mortgage credit held by the GSEs stands out: GSEs accounted for 48 percent of all 

home mortgage credit outstanding at the end of 2008, as compared to 30 percent held on 

balance sheet by banks. Also significant was the surge in the midst of the housing bubble 

of the share of home mortgage credit held by private label MBS issuers. At their height 

in 2006, these issuers held 20 percent of home mortgage credit outstanding, about twothirds of which was backed by subprime mortgages and other non-traditional 

 

8

 A number of variations on this process have been developed, including the “re-pooling” of, for example, 

mortgage-backed securities to create collateral for a new kind of security called Collateralized Debt 

Obligations or “CDOs,” as well as re-pooling and re-securitization of these instruments into CDOs-squared 

(“CDO2

”) and even CDOs-cubed (“CDO3”). Most market participants agree that the re-layering of the 

securitization process greatly exceeded reasonable bounds, essentially because of widespread underestimation, and therefore under-pricing, of the risks associated with these more exotic instruments. As a 

consequence, most market observers believe that it will be a long time, if ever, before such instruments reemerge in quantity. 

9

 There are important exceptions to this statement, most particularly in cases where banks sell loans “with 

recourse,” that is, where the purchaser has the right to require the selling bank to take back, under welldefined circumstances, “bad” loans and replace them in the pool with “good” loans. Under these (very 

common) circumstances, banks do in fact have some degree of capital requirements. 

5
mortgages.10 As the housing bubble burst, the role of private label MBS issuers declined 

rapidly, to 16.7 percent by the end of 2008. 

Figure 3. Home Mortgage Credit Extension:

Structured Finance Looms Large

Banks

(Commerical Banks, Bank Holding 

Cos., Thrifts, Credit Unions)

Government Sponsored 

Enterprises 

Private Label

MBS Issuers

Finance Cos. & Other

0%

20%

40%

60%

80%

100%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Percent of Total Home Mortgage 

Credit Outstanding,

by Major Holders

Source: Flow of Funds, Federal Reserve System; Haver Analytics.

The significance of the recent decline in the role of private label MBS issuers is better 

illustrated by a consideration of net new credit flows. Looking at new credit flows also 

highlights important developments in consumer (i.e., non-mortgage) credit markets. The 

change in perspective allows us to shift from looking at how much credit is currently 

outstanding in the market place to a consideration of how much new credit is being 

generated in a given time period. That point of view coincides with present concerns 

about current and likely future credit creation, or lack thereof; and this, in turn, is 

important because new credit creation is likely to be a necessary complement to higher 

rates of economic growth. 

Table 1 shows the relative importance of banks and nonbanks in the provision of new 

credit over the 2001-2006 boom period. The Home Mortgage Market column shows that 

as the housing market bubble inflated, banks provided, on average, less than 30 percent 

of the financing for new home mortgage credit, whereas structured finance funded over 

60 percent. Further, although the GSEs account for the lion’s share of home mortgage 

credit outstanding (as illustrated in Figure 3), over the bubble period they actually were 

responsible for extending less new mortgage credit than were private label issuers. In 

 

10 The remaining approximately one-third of private label MBS were backed by jumbo mortgage loans, 

which are mortgages that exceeded the conforming limits set by the GSEs; that limit has varied over time, 

but currently indicates mortgages for amounts greater than $625,000. 

6
Table 1. New Credit Provision to Households over the Boom

(share, in percent, of net credit extension, averaged over 2001-2006)

 Home Mortgage Market Consumer Credit Market

(Non-mortgage) 

Banks 29.1 37.9 

 of which: 

 Commercial Banks

 

21.0

 

26.0

 Thrifts 5.2 4.5 

 Credit Unions 2.9 7.4 

Structured Finance 62.0 22.1 

 of which: 

 GSEs

 

29.1

 

- 

 Private Label MBS Issuers 32.9 - 

 ABS Issuers (Non-mortgage) - 22.1 

All Other 8.9 40.0 

Source: Flow of Funds, Federal Reserve System; Haver Analytics. 

GSE MBS

[44.7%]

Total Private

Label MBS [55.3%]

Subprime MBS portion of 

Private Label

Alt-A MBS portion of

Private Label

Jumbo MBS portion of Private 

Label

0

10

20

30

40

50

60

Figure 4. Shares of MBS Issuance at Height of Housing Bubble

(Percent of MBS Issued in 2006)

Source: UBS Mortgage Strategist (June 10, 2008).

7
fact, by 2006, private label issuers issued 55 percent of all mortgage-backed securities 

compared to the 45 percent share accounted for by the GSEs. Furthermore, about 40 

percent of private label issuers’ MBS were backed by subprime home mortgage loans, as 

Figure 4 illustrates. 

The bank-versus-nonbank mix over the bubble period was somewhat different for 

consumer credit extension compared to the home mortgage market, as the far right-hand 

column in Table 1 shows. Banks accounted for considerably more new credit provision 

for consumers (37.9 percent) as compared to ABS issuers (largely due to modest 

pullbacks in ABS issuance in 2003 and 2004, as Figure 7 below illustrates), but at 22.1 

percent, structured finance consumer credit was still a substantial share. 

Credit Provision to Households: Where Do We Stand Now? 

Whether measured by outstanding debt balances or by new credit flows, it is clear that 

both structured finance and banks play significant roles in credit provision, especially in 

the home mortgage and consumer credit markets. What is really at issue currently is the 

nature of those relationships during the ongoing recession. An examination of the data 

highlights several stark changes. 

Figure 5 examines trends in the provision of new mortgage credit annually over the 2001-

2006 bubble period, and over the 2007-2008 bursting of the housing bubble. Several 

patterns are noteworthy. First, during 2008 there was a net decline in new bank credit for 

home mortgage loans (i.e., loans that banks chose to hold on balance sheet rather than to 

sell into the securitization process). That (net) negative flow was due to the combination 

 

Figure 5. New Flow of Home Mortgage Credit Over Bubble and Bust

Banks

(Commercial Banks, Bank Holding 

Cos., Thrifts, Credit Unions -

blue bars)

Government Sponsored 

Enterprises (red bars)

Private Label

MBS Issuers

Other Non-Banks

-400

-200

0

200

400

600

800

2001 2002 2003 2004 2005 2006 2007 2008

Net Home Mortgage Credit 

Extension in $Billion

Source: Flow of Funds, Federal Reserve System; Haver Analytics.

8
of several factors, including the fact that a number of large banks and thrifts were merged 

into other banks, as well as the fact that banks generally tightened their lending 

standards.11 Nevertheless, the decline in new mortgage lending by banks was greatly 

surpassed by the precipitous drop in private label MBS issuance, particularly as the 

subprime mortgage market shut down. On the other hand, banks and other mortgage 

originators continued to provide new mortgage loans underlying the substantial positive 

amount of GSE MBS issuance. 

From Figure 5 it is clear that the recent “story” in the home mortgage market revolves 

more heavily around structured finance activity than around developments in the banking 

sector. Turning to the MBS market, Figure 6 looks at monthly data on issuance from the 

beginning of 2008 through May of this year.12 It shows that there is no meaningful 

issuance activity in the private label MBS market, while the GSEs remain a strong source 

of new mortgage credit extension. Policymakers likely will bear this fact in mind as they 

debate the future of the GSEs.13

Figure 6. Flow of Home Mortgage Structured Finance During the Crisis:

GSEs the Only MBS Game Going

(Monthly Issuance of Mortgage-Backed Securities)

GSE MBS Issuance

Private Label MBS Issuance

0

50

100

150

200

250

Jan-08 May-08 Sep-08 Jan-09 May-09

$ Billion

Source: Securities Industry and Financial Markets Association.

Figures 7 and 8 look at recent and current data on new flows of non-mortgage consumer 

credit in a manner parallel to the analysis of mortgage market trends. Figure 7 shows the 

 

11 See especially recent editions of the Senior Loan Officer Opinion Survey on Bank Lending Practices, 

Board of Governors of the Federal Reserve System. 

12 The new issuance data in Figure 5 is somewhat different from the Figure 6 net (inflows minus

reductions) data. 

13 The Department of the Treasury’s whitepaper Financial Regulatory Reform: A New Foundation (June 

2009) outlines five major options “for the reform of the GSEs.” See pp. 41 and 42 in particular. 

9
wide swings in new consumer credit provision by banks, ABS issuers, and other entities. 

In contrast to the mortgage market, as the crisis took hold in 2007 and 2008 it was banks 

that continued to provide new flows of credit to the consumer credit market, while the 

structured finance sector on net decreased the flow of credit to consumers. Indeed, as of 

the end of 2008, very little new credit was being provided to consumers from any 

nonbank source. 

Figure 7. New Flows of Consumer Credit Over Bubble and Bust

Banks

(Commercial Banks, Bank Holding 

Cos., Thrifts, Credit Unions -

blue bars)

ABS Issuers

(red bar)

Finance Cos.

Other

-40

-20

0

20

40

60

80

100

120

2001 2002 2003 2004 2005 2006 2007 2008

Net Consumer Credit Extension in 

$Billion

Source: Flow of Funds , Federal Reserve System; Haver Analytics.

Figure 8 focuses on the current state of play in the consumer ABS market by plotting 

quarterly data on issuance in three major component sectors over the emergence of the 

crisis through the first quarter of this year. Together, credit card ABS (36 percent), auto 

loan ABS (22 percent), and student loan ABS (18 percent) accounted for more than threequarters of all ABS issuance in 2008.14 Figure 8 shows that the consumer ABS market 

began at least a partial recovery as of the second quarter of 2009, assisted in large 

measure by the implementation of the Term Asset-Backed Securities Loan Facility 

(“TALF”) program. Treasury and Federal Reserve efforts to encourage participation in 

the TALF program are aimed ultimately at restoring sufficient private sector funding for 

asset-backed securities markets.15

 

14 Data from Securitization Monthly, Deutsche Bank (January 2009). 

15 A recently-released Federal Reserve report indicates that the TALF program has begun to stimulate at 

least a modest increase in asset-backed securities issuance. Specifically, in May 2009 there were “ABS 

deals worth a total of about $13.6 billion, of which $10.6 billion was financed through the TALF” (Federal 

Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet, Board of 

Governors of the Federal Reserve System [June 2009]). William C. Dudley, President of the Federal 

Reserve Bank of New York, noted in a recent speech that since March, when the TALF program was first 

10
Figure 8. Consumer ABS Markets Plunged in 2008, Tepid Recovery So Far

(Quarterly Issuance of Selected Non-Mortgage Consumer Asset-Backed Securities)

Credit Card ABS Issuance

Auto Loan ABS Issuance

Student Loan ABS Issuance

0

5

10

15

20

25

30

2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2

$ Billion

Source: Securities Industry and Financial Markets Association.

Conclusion 

This article began by observing that a fundamental difference between the current 

recession and previous ones is the significantly greater role played by nonbank credit 

providers – known also as the “shadow banking system” – as compared to the traditional 

banking sector. In large part, that distinction is meaningful because of the different – and 

generally more modest – measures that regulatory and monetary authorities can use to 

stimulate and steer responses by nonbanks compared to banks, a consideration that is 

especially important during the current extraordinary times in finance. In addition, 

particularly in the markets for credit extension to American households, it is clear that 

structured finance – mortgage-backed securities and consumer asset-backed securities – 

have become central. 

A closer look at the most recent data in household credit markets yielded two key 

observations about structured finance, both of which have important public policy 

implications. First, in the home mortgage market, credit provision supported by GSEs’ 

issuance of mortgage-backed securities is currently the main game going; this fact has 

significant implications for discussions of the future role of the GSEs. Second, while 

structured finance does not play the same dominant role in the consumer credit market as 

it does in the home mortgage market, ABS issuance nevertheless supports a considerable 

share of consumer credit. That fact adds urgency to policy discussions about stimulative 

measures, including in particular the TALF program. 

 up and running, “TALF loans have accounted for a bit more than half of total issuance volume of ABS,” a 

sign that the ABS market is not entirely dependent on TALF funding, as envisioned by the program’s 

architects (“A Preliminary Assessment of the TALF,” Remarks at the Securities Industry and Financial 

Markets Association and Pension Real Estate Association’s Public-Private Investment Program Summit, 

New York City [June 4, 2009] ). More recently, attention has turned to the commercial mortgage-backed 

securities (CMBS) market, which remains all but shutdown. 

11