In January 2023, US banks provided over $1 trillion in loans to non-regulated “shadow banks.” Outstanding loans to unregulated financial entities like private equity firms and hedge funds reached a record $1.0024 trillion, up 12.16% from the same month the previous year, according to data released by the US Federal Reserve on Friday.
The rapid growth of lending to shadow banks has raised concerns among regulators about potential systemic risks. These so-called shadow banks are often less regulated and may lend money to riskier enterprises than what a regulated institution would be able to tolerate. However, major banks like Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders, which has led to an increase in exposure to higher-risk debt.
According to experts quoted in The Financial Times, such loosely regulated financial institutions have exposed banks to lower-quality loans. 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 grown significantly, reaching over 6% of all bank lending. This is more than auto lending and not far below credit card debt. Despite concerns about potential systemic risks, experts believe that the growth of shadow banking is likely here to stay as it continues to provide important liquidity for businesses that may struggle to secure financing from traditional sources.