The amount of loans made by US banks to less regulated shadow lenders surpassed $1 trillion in January. 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, according to data released by the US Federal Reserve on Friday. It has become one of banking’s fastest-growing businesses at a time when lending volumes overall are growing at a slower rate.
Several major banks including Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders. The sharp rise in lending to shadow banks has raised concerns among regulators over potential systemic risks, as 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 have warned that such loosely regulated financial institutions have exposed banks to lower-quality loans. Major banks have steadily ramped up lending to less regulated finance companies, with the share of financing to shadow banks reaching 6% of all bank lending since 2010, more than auto lending and not far below credit card debt. This trend is likely to continue as more traditional banks look for new ways to grow their business in an increasingly competitive marketplace.