The alternative lending boom continues, but industry experts say that the shadow lending sector is headed for greater scrutiny by regulators — and that some alternative lending players can pose just as much risk to the economy as the banks before the 2008 financial crisis.
In a new article, the Commercial Observer highlighted the emergence of the same risky trends that were found in the traditional banking industry now popping up in alternative finance. According to Federal Reserve Vice Chairman Stanley Fischer at a recent conference, “It is now eight years since major cracks in the financial system that led to the global financial crisis first appeared in nonbank entities and activities.”
He added that online crowdfunders and other players “can pose the same vulnerabilities as banks, including high leverage, excessive maturity transformation and complexity, all of which can lead to financial instability.”
Reports said that while the tightening regulation of the banking sector following the financial crisis is unsurprising, regulators are more frequently targeting shadow lenders in the same ways. But the regulations burdening banks have also been why alternative lenders were allowed to emerge in the current market climate.
Recently, reports said, the CRE Finance Council held its annual conference during which CRE Finance Council Vice President of Policy and Industry Analysis Christina Zausner elaborated on the heightening regulatory threats looming over the alternative finance sector.
“The regulatory framework for insurance companies, nonbank CMBS lenders and large asset managers, in particular, is evolving,” she said. “The question on everyone’s mind right now is whether the regulators are going to come away tomorrow thinking differently about CMBS or debt funds and mezzanine lending. They want to know what the regulators are going to tell them to change about their business strategies.”
This isn’t just a U.S. issue, either. Reports said that the Financial Stability Oversight Council, which monitors the globe’s financial system with the Financial Stability Board, are eyeing alternative lending regulation and liquidity requirements in the near future.
But for many authorities, the goal is not to squeeze shadow lenders out of business. It is simply to improve transparency for lenders and borrowers while acknowledging that alternative lenders have largely filled a necessary gap in lending needs following banks’ retreat from the space — especially when it comes to small business loans.
So far, reports said, U.S. commercial real estate lenders will face the most immediate regulatory crackdowns. But five years from now, Zausner said, more regulatory changes will come into play from both national and international authorities, and laws over time will almost certainly create change in the alternative finance space.
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