In January 2023, US banks made $1 trillion in loans to less regulated shadow lenders, according to data from the US Federal Reserve. This represents a 12.16% increase from the same period last year, and has become one of the fastest growing banking businesses at a time when overall lending is growing more slowly.
However, this surge in shadow bank lending has raised concerns among regulators about potential systemic risks. Shadow banks are often less regulated and many lend money to businesses where the returns may be higher, but the risks are much higher than what a regulated institution could tolerate.
Regulators are concerned that these alternative lenders are increasing banks’ exposure to higher debt risk. Several major banks, including Citigroup and Wells Fargo, have strengthened their ties to alternative asset lenders. These big banks have been steadily increasing their lending to less regulated financial companies since 2010 when they were first required to report the volume of loans made to non-bank lenders. The share of shadow bank financing has reached 6% of all bank loans, more than car loans and not far below credit card debt.