NEW YORK–A growing cohort of so called “shadow banks” that don’t accept deposits are eagerly looking to expand their lending presence as many banks pull back for a variety of reasons.
Those seeking to expand their lending presence include big investment firms such as Apollo Global Management, Ares Management and Blackstone, which have joined other firms such as themselves in making loans and growing the private credit industry sixfold since 2013, to $850 billion, according to data from the financial data provider Preqin that was cited by the New York Times.
“The shift in loans from banks to nonbanks comes with risk,” the Times’ Dealbook reported. “Private credit has exploded partly because its providers are not subject to the same financial regulations put on banks after the financial crisis. What does it mean for America’s loans to be moving to less-regulated entities at the same time the country is facing a potential recession?
“Institutions that make loans but aren’t banks are known (much to their chagrin) as “shadow banks.” They include pension funds, money market funds and asset managers,” the report continued.
Greater Risks
The Times noted that because shadow banks don’t take in deposits, they’re not subject to the same regulations as banks, which allows them to take greater risks.
“And so far, their riskier bets have been profitable: Returns on private credit since 2000 exceeded the public benchmark by 300 basis points, according to Hamilton Lane, an investment management firm,” the Times stated.
While most of the focus to date has not overlapped the kinds of bread-and-butter loans credit unions typically make, an evolution in the market could bring it closer to more direct competition, the report suggests.
“Direct lending may get another boost as regional banks pull back, particularly in commercial real estate like office buildings, where landlords may be looking to refinance at least $1.5 trillion in mortgage contracts over the next two years, Morgan Stanley analysts estimate,” according to the Times. “America’s regional banks have accounted for about three quarters of these kinds of loans, Morgan Stanley’s research shows.”
‘Never Been Tested’
The Times added that “direct lending at this scale has never been tested: Nearly all its decade-long growth has happened amid cheap money and outside the pressures of a recession. The industry’s opacity means it’s nearly impossible to know what fault lines exist before they break.”
In addition, the Times said, the shadow lenders are also looking to break into small and midsize businesses as potential targets for business.
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