In recent years, the US banking industry has seen a rapid growth in lending to non-regulated “shadow banks.” Despite concerns from regulators over the potential systemic risks associated with these alternative lenders, major banks such as Citigroup and Wells Fargo have strengthened their ties with shadow banks.
According to data released by the US Federal Reserve on Friday, outstanding loans to non-depository financial entities like private equity firms and hedge funds reached $1.0024 trillion in January 2023, representing a roughly 12.16% year-over-year surge from January 2023. This represents one of banking’s fastest-growing businesses at a time when lending volumes overall are growing at a slower rate.
The sharp rise in lending to shadow banks has raised concerns among regulators about potential systemic risks. Shadow banks are often less regulated than traditional banks, and many lend money to enterprises where returns may be greater but risks are much higher than what a regulated institution would be able to tolerate. Experts have warned that such loosely regulated financial institutions have exposed banks to lower-quality loans.
Despite these concerns, major banks have steadily ramped up lending to less regulated finance companies. The Financial Times notes that since 2010, when banks were first required to report the volume of loans made to non-bank lenders, the share of financing to shadow banks has reached 6% of all bank lending, more than auto lending and not far below credit card debt.
Regulators will continue to monitor this trend closely and take action if necessary to mitigate potential risks to the banking system as a whole.