US lenders’ debt to shadow banks passes $1tn

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The amount US financial institutions have loaned to shadow banks such as fintechs and private credit groups has passed $1tn, as regulators warn that growing ties between traditional and alternative lenders could present systemic risks.

The US Federal Reserve reported on Friday that US banks crossed the 13-figure threshold in loans outstanding to non-deposit-taking financial companies at the end of January. These hedge funds, private equity firms, direct lenders and others use the money to leverage investments and increasingly lend it out to a range of risky borrowers that regulators have discouraged banks from lending to directly.

That amount is up 12 per cent in the past year, making it one of banking’s fastest-growing businesses when overall loans growth has been sluggish, up just 2 per cent.

The rapid rise in loans to shadow banks concerns regulators because there is very little information or oversight regarding the risks being taken by those groups. Last month, EU regulators said they would dig deeper into the ties between traditional lenders and shadow banks.

Acting head of the Office of the Comptroller of the Currency Michael Hsu, one of the top US bank regulators, recently told the Financial Times that he thought the lightly regulated lenders were pushing banks into lower-quality and higher-risk loans.

“We need to solve for the race to the bottom,” said Hsu. “And I think part of the way to solve it is to put due attention on those non-banks.”

Recently, a number of banks have sought closer ties to non-bank lenders. Last month, Citigroup said it was partnering with an outside alternative investment manager, LuminArx, to provide “innovative leverage solutions” to its $2bn loan fund. Citi was also a leader on a $310mn loan to Sunbit, a buy-now, pay-later company that specialises in auto repair shops and dentist offices.

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