As shown in table 2, historical evidence suggests that the credit provided by what I termed long-term investors – that is, insurance companies, pension funds, and mutual funds – has tended to offset movements in bank credit relative to GDP, as indicated by the strong negative correlation of credit held by these institutions with bank credit during recessions.
In other words, these institutions have acted as a spare tire for the banking sector. 4 However, complexity also poses challenges. While the financial crisis arguably started in the nonbank sector, it quickly spread to the banking sector because of interconnections that were hard for regulators to detect and greatly underappreciated by investors and risk managers in the private sector.