The Shadow Banking Boom: Banks Embrace Higher-Risk Lending to Non-Regulated Entities, Raising Concerns over Systemic Risks

Less Regulated ‘Shadow’ Lenders Receive $1 Trillion in Loans from US Banks

Banks on Wall Street have been increasingly lending to non-regulated “shadow banks,” leading to greater exposure to higher-risk debt, according to regulators. Major banks such as Citigroup and Wells Fargo have strengthened their connections with alternative asset lenders. In January 2023, loans to non-depository financial entities reached over $1 trillion, a 12.16% year-over-year increase from January 2013. This has raised concerns among regulators about potential systemic risks.

These shadow banks are less regulated and often lend to enterprises with higher potential returns but also higher risks. Financial experts have warned that banks are taking on lower-quality loans by increasing lending to these loosely regulated financial institutions. Since 2010, 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. This has made shadow banking one of the fastest-growing businesses in the banking industry, raising concerns about the potential risks involved.

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