Finance
How rising bank lending to non-bank financial institutions reallocates credit away from firms
Bank balance sheets have undergone a significant transformation. This column finds that banks have increasingly reallocated lending towards non-bank financial institutions. A rising share of this activity finances government securities rather than credit to the real economy. This shift is driven by the rapid expansion of securities-financing operations, surging sovereign issuance, and the unwind of quantitative easing. Bank balance-sheet constraints reinforce this trend by making safer and more liquid loans comparatively attractive. As banks expand lending to non-bank financial institutions, they cut back on firm lending, with smaller and riskier firms bearing the largest contractions in borrowing and overall debt.