So-called ‘shadow banks’ have filled gaps left by traditional lenders since the 2008 financial meltdown
One of the notable trends in US banking is the lending of vast sums to non-bank financial institutions—firms that, in many cases, are direct competitors. According to data analyzed by Bloomberg, traditional bank lending to these firms, which include private equity firms, hedge funds, and private credit companies, has more than doubled in the past five years, reaching $1 trillion in 2024.
This 16% annualized growth rate has significantly outpaced bank lending to other sectors, including agriculture, credit cards, and commercial and industrial businesses. Bloomberg noted that the trend reflects the expansion of alternative lenders, often referred to as shadow banks, which have stepped into gaps left by traditional banks following the 2008 financial crisis.
Banks supporting their own competition
Brian Foran, a banking analyst at Truist Securities, described the situation as a “weird dance.” He said, “in effect, banks are financing their own competition.”
Many traditional banks have embraced this shift, seeing it as an opportunity to generate additional revenue while limiting direct exposure to individual borrowers.
Citizens Financial Group Inc., for example, has significantly expanded its relationships with private equity firms, more than doubling its roster of clients since 2014.
“We’re making more money from the growth in private credit than we’re losing in direct head-to-head competition with them,” said Bruce Van Saun, Citizens’ CEO.
Regulatory concerns
Despite the revenue potential, the rapid increase in bank loans to non-depository financial institutions (NDFIs) has raised concerns among regulators. Watchdogs fear that deeper ties between banks and shadow banks could expose the financial system to new liquidity and credit risks.
A report from the Federal Reserve Bank of Boston found that the 31 largest banks undergoing stress tests last year had committed roughly $300 billion in loans to private credit and private equity firms, up from just $10 billion in 2013. In response, regulators have introduced new reporting requirements. The Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, and the Federal Reserve now mandate that banks provide more detailed disclosures on their exposure to NDFIs.
Market implications
The new regulations, which banks began complying with earlier this year, reveal that loans to NDFIs made up 8.5% of all bank loans at the end of 2024, compared to less than 1% in 2010. Analysts noted that while private credit firms reduce some risks by securing long-term investments, their increasing reliance on bank loans could pose unforeseen vulnerabilities.
“This market exists for a reason,” said Jeff Davis, a managing director at Mercer Capital. “But it hasn’t been truly tested in a downturn.”
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