In the US, banks are giving out $1 trillion of loans to non-regulated “shadow banks.” Despite concerns from regulators over potential systemic risks, major banks such as Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders.
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 last month, representing a roughly 12.16% year-over-year surge from January 2023. This has become 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 over potential systemic risks. These so-called shadow banks are often less regulated 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 told The Financial Times that such loosely regulated financial institutions have exposed banks to lower-quality loans. 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.