In recent years, US banks have been increasingly lending to non-regulated shadow banks, with outstanding loans to non-depository financial entities reaching $1.0024 trillion in January 2023. This represents a roughly 12.16% year-over-year surge from January 2013, and it has become one of banking’s fastest-growing businesses at a time when lending volumes overall are growing at a slower rate.
Despite the growth of shadow banking, regulators remain concerned about potential systemic risks associated with these less regulated lenders. Several major banks including Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders in an effort to increase their exposure to higher risk debt. However, experts warn that such loosely regulated financial institutions have exposed banks to lower-quality loans and increased the risk of potential financial crises.
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. As a result, regulators are closely monitoring these alternative lenders and their impact on the broader financial system.