Shadow banks have become one of the fastest-growing businesses in banking, with US banks giving out over $1 trillion of loans to these less regulated financial entities in January 2023. This represents a roughly 12.16% year-over-year surge from the same month in 2023, according to data released by the US Federal Reserve on Friday.
Despite this growth, regulators are concerned about potential systemic risks associated with shadow banks. These so-called shadow banks are often less regulated and may 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 have warned that such loosely regulated financial institutions have exposed banks to lower-quality loans. Major banks like Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders, further increasing their exposure to these risks.
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. The Financial Times has raised concerns over potential systemic risks associated with these so-called shadow banks and their impact on the banking industry as a whole.