• Mon. Mar 4th, 2024

Shadows of Risk: The Rise of Shadow Banks and the Concerns Surrounding Their Growth in Banking


Feb 13, 2024
Less Regulated ‘Shadow’ Lenders Receive $1 Trillion in Loans from US Banks

Shadow banks have become one of the fastest-growing businesses in banking, with US banks giving out over $1 trillion in loans to these less regulated lenders in January 2023. 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 growth has raised concerns among regulators over potential systemic risks, as shadow banks are often less regulated and lend money to enterprises where returns may be greater but risks are much higher than what a regulated institution would be able to tolerate.

The sharp rise in lending to shadow banks has exposed banks to lower-quality loans. Experts told The Financial Times that such loosely regulated financial institutions have increased banks’ exposure to higher risk debt. Major banks including Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders, as they look for new sources of revenue and diversify their portfolios. However, this trend has also raised concerns about the potential for systemic risks and the need for stronger regulation of shadow banks. 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.

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