Less Regulated ‘Shadow’ Lenders Receive $1 Trillion in Loans from US Banks

In recent years, US banks have been increasingly tying themselves to non-regulated shadow banks, despite concerns from regulators over the potential risks involved. According to data released by the US Federal Reserve on Friday, outstanding loans made by banks to these alternative lenders reached $1.0024 trillion in January 2023, a roughly 12.16% year-over-year surge from January 2023. This has made shadow banking one of the fastest-growing businesses in the financial industry at a time when overall lending volumes are growing more slowly.

However, this sharp rise in lending to shadow banks has also raised concerns among regulators over potential systemic risks. The Financial Times reported on Monday that such loosely regulated financial institutions often take on greater risks and may expose banks to lower-quality loans. Despite these concerns, major banks such as Citigroup and Wells Fargo have continued to strengthen their ties with shadow bankers, ramping up their lending activities to these less regulated finance companies.

Since 2010, when banks were first required to report the volume of loans made to non-bank lenders, the share of financing provided by shadow banks has steadily increased. It now accounts for more than 6% of all bank lending, making it almost equal to auto lending and not far below credit card debt. While some experts see this as an opportunity for innovation and growth in the financial sector, others warn that it could lead to greater instability and risk if not properly regulated.

By Editor

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