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

Shadow Banks: The Risks and Rewards of Increased Exposure in Banking

Major banks such as Citigroup and Wells Fargo have strengthened their connections with non-regulated financial entities, also known as “shadow banks,” leading to increased exposure to higher-risk debt. This has raised concerns among regulators about potential systemic risks. According to data from the US Federal Reserve, loans to shadow banks reached over $1 trillion in January 2023, a 12.16% year-over-year increase from the same month in 2023.

These shadow banks are less regulated than traditional banks 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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