The credit channels in the loan market have changed over the last decade. Prior to the crisis the ascent of the shadow banks system reduced the importance of traditional lending lines. The ABS commercial paper market was used to securitize loans that were usually held by commercial banks. This market fueled the CBO and sub-prime mortgage growth but it also served as a way to bundle traditional loans. The supply of credit was not coming from bank depositors but through money market funds and other non-banking sources. Bank regulators had less control over the credit system. However, since 2007, there has been a significant shrinking of this system. It may never come back.
Where did the money go? It went back to banks as deposits. It also went to the Treasury bill market. Private credit has been replaced with government credit demand. This demand has still been met by the market through a shifting of portfolios to Treasuries. Now since the crisis the amount in money funds has actually dropped but it has not moved to private credit but toward Treasury bonds with longer term maturities. The reach for yield has fueled the Treasury market and has kept the government deficit under control.
The non-financial and bank commercial paper markets have stabilized but only back to levels similar to 2004. This suggests that the demand for credit is still weak.
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