WASHINGTON– U.S. banks had loaned out more than $1 trillion to non-deposit-taking financial institutions, also known as “shadow banks,” as of Jan. 31, according to a new report from the Federal Reserve.
A shadow bank is defined as any private credit lender that’s not a commercial bank and thus not weighed down by regulatory oversight, according to the Daily Upside. That can include hedge funds, fintech groups, major investment banks like Goldman Sachs, and even certain divisions of commercial banks all fall under the shadow umbrella, the report stated.
“Rather than deposits, they take investments or loans, and the money isn’t insured by the federal government,” the Daily Upside said. “Essentially, they act as middlemen between traditional lenders and potentially unsafe endeavors like investing in startups and making risky mortgage loans.”
‘Just Good Business’
The report said that for many big lenders, interacting with shadow banks is “just good business,” and noted that in January Citibank led a $310 million loan to buy-now, pay-later service Sunbit, the latter’s largest transaction to date.
“Meanwhile, Wells Fargo partnered in September with private asset management firm Centerbridge to pump billions of dollars into creating Overland Advisor, a business development company,” the report added.
But now, said the Daily Upside, “the pace at which commercial banks are lending money to shadow banks could be entering dangerous territory,” with the report noting traditional banks’ loans to their dark counterparts have jumped about 12% year-over-year, outpacing overall loans, which have gone up just 2% from a year ago.
Yellen Expresses Concern
Treasury Secretary Janet Yellen recently told the Senate Banking Committee that shadow banks “are reliant on short-term financing that may be a lot less stable than deposits, and in stressful times, their credit lines can be pulled. There is concern that in stressful market conditions we could see the failure of one of these,” the Daily Upside said.
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