US banks have become increasingly involved with non-regulated “shadow banks,” which has raised concerns among regulators about the potential systemic risks associated with these alternative lenders. Despite this, major banks like Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders.
In January 2023, the amount of loans made by US banks to shadow banks surpassed $1 trillion, representing a roughly 12.16% year-over-year surge from the same month in 2022, according to data released by the US Federal Reserve on Friday. This makes shadow banking 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 warn that such loosely regulated financial institutions have exposed banks to lower-quality loans, as they often do not adhere to the same standards as regulated institutions. Major banks have steadily ramped up lending to less regulated finance companies, and 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.