This paper exploits the Financial Accounts of the United States to derive long time series of bank and nonbank credit to different sectors, and to examine the cyclical behavior of these series in relation to (i) the long-term business cycle, (ii) recessions and recoveries, and (iii) systemic financial crises. We find that bank and nonbank credit exhibit different dynamics throughout the business cycle. This diverging cyclical behavior of output and bank and nonbank credit argues for placing greater emphasis on sector-specific macroprudential measures to contain risks to the financial system, rather than using interest rates to address any vulnerabilities. Finally, we examine the role of bank and nonbank credit in the creation of financial interconnections and illustrate a method to conduct macro-financial stability assessments.

The 2007–08 financial crisis made poignantly evident that neither policymakers nor the academic community understood the extent of the risks involved in nonbank financial activity, which became of macroeconomic relevance as the crisis unfolded. This painful lesson unleashed a massive research and policy agenda seeking to understand, measure, and (re-) regulate the nonbank sector. Progress has been made in various fronts, ranging from the quantification and monitoring of the nonbank sector (e.g., Pozsar et al., 2010) to an ongoing important regulatory reform (cf., FSB, 2011). However, we still know little about the cyclical behavior of credit flows between banks and nonbanks and their relationship with the rest of the economy. In this paper, we use the Financial Accounts (FAs) of the United States (formerly known as the Flow of Funds) to construct measures of credit among all sectors of the economy.