Economic Insights — It may look like the explosive growth of nonbank financial institutions has come at the expense of banks, but the relationship between the two is in fact symbiotic.
Bank lending to NBFIs has increased dramatically. Although NBFIs compete with banks in certain loan markets — most notably, home mortgage markets — NBFIs rely on bank funding to finance their own lending. The substitution of marketable securities for loans, and the transformation of portfolios of loans into marketable securities, are key trends in the growth of NBFIs and, in turn, bank lending to NBFIs. The bulk of this bank lending takes the form of lines of credit. Banks play this role because deposit services and lines of credit are complementary goods. Thus, banks provide the liquidity that makes the entire arrangement possible. Metaphorically speaking, banks are the grease that keeps the machine going.
This article appeared in the Third Quarter 2024 issue of Economic Insights. Download and read the full issue.
