On August 20, the New York Fed released an economic analysis titled “The Disparate Outcomes of Bank- and Nonbank-Finance Private Credit Expansions.” The analysis revealed that while long-term trends in increased access to credit are generally thought to improve real activity, rapid credit expansions can predict adverse outcomes such as lower GDP growth and increased likelihood of crises. The study focused on how bank and nonbank credit growth have generally developed asynchronously in the U.S. since 1950 with some outlier periods like after the 2008 global financial crisis.

The New York Fed’s analysis showed that the composition of lending during a credit expansion significantly affects real outcomes. Specifically, growth in nonbank credit predicted negative GDP growth in the short to medium term but had no significant impact in the long term. Conversely, growth in bank credit was associated with persistently negative GDP growth over the medium to long term. Further, the New York Fed report found that nonbank credit growth also lowered the likelihood of extreme negative outcomes on GDP growth, while bank credit expansion increased the probability of such extreme outcomes. These insights suggested that the type of lender not only influences the magnitude of credit booms but also the associated risks to economic stability, providing valuable information for policymakers and financial industry stakeholders.