Regulators Worry as Banks’ Debt to Shadow Lenders Tops $1 Trillion

American lenders have loaned so-called “shadow banks” more than $1 trillion, and regulators are worried.

That’s according to a report Saturday (Feb. 10) by the Financial Times (FT), which cites recent figures from the U.S. Federal Reserve showing that U.S. banks’ loans to non-deposit-taking financial companies had gone past $1 trillion at the end of last month.

That amount is up 12% over the last year, the report said, making these loans — to hedge funds, direct lenders and private equity firms — one of the fastest-growing areas of business for banks at a time when overall loan growth has slowed.

However, the report noted that the recipients of the loans are using the money to leverage investments and increasingly lend it out to riskier borrowers, of whom regulators have warned banks against lending directly.

According to the FT, the rise in loans to these lenders has regulators worried as there is little information about the risks these companies are taking.

Michael Hsu, acting head of the Office of the Comptroller of the Currency, told the FT recently he thought the loosely regulated lenders were pushing banks to make lower-quality and higher-risk loans.

“We need to solve the race to the bottom,” Hsu said. “And I think part of the way to solve it is to put due attention on those non-banks.”

As PYMNTS wrote last week, this rise in lending to — and by — shadow banks is happening as several America’s smaller businesses appear ready to switch to lending channels outside of traditional banks.

“Those channels would include the large hedge funds and private equity vehicles such as BlackRock and Apollo Global Management,” that report said. “Banks, too, have been partnering with investment managers to offer private credit options, as shown in this announcement by Citi and LuminArx creating Cinergy.”

Concern about the rise of shadow banks doesn’t stop in the U.S. Earlier this year, European Banking Authority (EBA) Chair José Manuel Campa said regulators in Europe were looking at the ties between banks and shadow banks — also known as non-bank financial institutions (NBFIs).

“We should be doing more and we are going to be doing more,” Campa told the FT last month in reference to efforts to gauge how banks would be affected by strains in the NBFI space.

“We need to have an understanding of the whole underlying chain in NBFIs,” he added.