Since 2010, when banks were first required to report the volume of loans made to non-bank lenders, US banks have given out over $1 trillion of loans to less regulated shadow banks. This is a significant increase from just 6% of all bank lending in January 2023. The financial ties between major banks and shadow lenders are strengthening, with institutions like Citigroup and Wells Fargo actively seeking out these alternative asset lenders.
The rise in lending to shadow banks has caused concern among regulators over potential systemic risks. 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 warn that such loosely regulated financial institutions have exposed banks to lower-quality loans.
The sharp increase in lending to shadow banks has also raised questions about the role of regulators in ensuring financial stability. While some argue that increased regulation would stifle innovation and growth in the industry, others argue that it is necessary to protect consumers and maintain systemic stability in the financial system.
Despite these concerns, the growth of alternative finance continues apace, with outstanding loans reaching $1.0024 trillion last month – a roughly 12.16% year-over-year surge from January 2023. As banking’s fastest-growing business at a time when overall lending volumes are growing more slowly, it is clear that alternative finance will continue to play an important role in shaping the future of banking and finance as we know it today.