The term conjures up a picture of lending and borrowing that resembles activity associated with, but not conducted by, commercial banks which is both over- and under-inclusive of actual risks to financial stability. Before elaborating on this point, though, let me review how the phrase does capture well the activities that played such a large part in precipitating and exacerbating the financial crisis.
1 Before 2007, large banks provided credit and liquidity support, whether explicit or implicit, for a range of intermediation entities, including finance companies, nonbank mortgage lenders, SIVs, and asset-backed commercial paper conduits. All of these entities engaged in maturity and liquidity transformation, frequently accompanied by significant leverage.