US shadow banking goes up

American banks have loaned over $1 trillion to shadow banking institutions, a development that has drawn the attention of the Federal Reserve. These shadow lenders are financial institutions that do not accept deposits, including various hedge funds, private investment companies, and private credit groups. They cleverly operate by taking loans from traditional banks and then lending these funds to those who are denied by banks, often making their borrowers high-risk.

In the last year, this amount has grown by 12%, making it one of the fastest-growing banking segments, while overall lending growth has been sluggish at just 2%.

Banks are happy to lend to such entities. Last month, Citigroup announced a collaboration with external alternative investment manager LuminArx to provide “innovative borrowing solutions” for its $2 billion credit fund. Citigroup also led a $310 million loan to Sunbit, a “buy now, pay later” company specializing in auto repair shops and dental offices.

Last year, Wells Fargo signed an agreement to provide a multi-billion dollar loan to a new credit fund managed by Centerbridge, a private investment firm worth $40 billion, known for acquiring P.F. Chang’s restaurant chain and business technology provider Computer Services Inc.

For all banks, shadow banking financing currently accounts for over 6% of all loans, slightly more than auto loans (5%) and just below credit cards, which only last year exceeded $1 trillion for the first time (7%).