US financial institutions have loaned more than $1 trillion to shadow banks, a new report from the US Federal Reserve has said.

Shadow banking refers to the lending activities that take place outside of traditional banking institutions and regulations from non-bank financial institutions like hedge funds, money market funds, and investment banks that act as lenders and borrowers in capital markets instead of taking deposits like traditional banks. It has grown to account for just under half of the world’s financial assets.

Late last year, the G20’s Financial Stability Board (FSB) and global securities markets regulator body IOSCO said that tackling shadow banking would be a priority in 2024. https://www.fstech.co.uk/fst/Global_Financial_Regulators_Shadow_Banking.php

The reality of the sector’s impact was highlighted by the Federal Reserve’s report which shows a 12 per cent year-over-year increase in loans outstanding to non-deposit-taking financial companies at the end of January. This is significantly higher than US banks’ overall loans growth which was up just two per cent.

Banks like Citigroup, Wells Fargo and JP Morgan have all ramped up their shadow bank financing, which now makes up more than six per cent of all loans in the US – above auto loans at five per cent and below credit cards at seven per cent.

The Federal Deposit Insurance Corporation last year proposed measures which would require banks to disclose more data on what types of shadow banks they are lending to, with comments on the proposal due at the end of February. Should it be adopted, banks would have to start reporting more detailed information from the next quarter.

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