The banking industry's share of debt held by the financial sector slipped during the recession, but has remained fairly stable overall for the past decade.
With private-sector borrowing on the decline, securitization moribund and a sea change in regulation that might weigh on banks' competitiveness, however, a host of forces could alter the balance.
Debt held by the banking industry fell 0.8 point from the third quarter of 2007 — just before the recession began — as a portion of total financial sector lending to 29.9% in the fourth quarter, according to data from the Federal Reserve (see charts below). Lifted by the consolidation of off-balance-sheet vehicles under new accounting rules, it rebounded to 31.2% in the first quarter.
That range is in line with the roughly 30% to 32% share for banks earlier in the decade. Most of the churn among components of the financial sector during the past 10 years has involved offsetting trends in the shadow system and the government-sponsored sector, as issuance of Wall Street mortgage bonds ballooned and collapsed, sapping volume from the federal apparatus for home finance and then giving way to it.
One factor that could soon work against banks is the prospect that higher capital requirements will increase their funding costs and force them to offer less competitive lending rates.
Douglas Elliott, a fellow at the Brookings Institution, has reckoned that banks can manage substantially higher capital levels while only
Because debt securities have for some time provided the majority of other forms of business credit, "borrowing that could most easily move to the capital markets or to other financial institutions has already shifted away from the banks," he wrote.
Still, noting the "intensity of competition in financial services" in a
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