Chart of Week – Size of Shadow Banking Market grows and grows

The chart below says it all, the size of the shadow banking market is booming. Lets explore a bit about what that could mean for business credit:

Why are structural and regulatory changes forcing new entrants?

New capital standards to boost bank capital combined with stringent Know Your Customer and AML compliance is impacting the supply side, and zero short term rates is impacting demand. New entrants such as asset managers, insurance companies, hedge funds, pension funds, online peer-to-peer lending platforms, etc. are finding ways to become investors for business credit.

Banks now have to compete with these shadow lenders and also work with different investors to redistribute loans on their books. It used to be when the banks had too much Sri Lankan or Pharma risk, they could resell to each other. That is changing fast.

Are we pushing risk where it cannot be seen?

The reason this is considered “shadow” (doesn’t that term really scare people) is that these loans are not regulated in the same way as banks. If we assume risk doesn’t change regardless of owner, is pushing loans to a more unregulated environment a bad thing. Ask the economists.

Will this be hot money?

The big concern with non banks is “here today and gone tomorrow” to find the next best investment. If you are lending money and turning it over when terms expire, will non banks roll over business credit? Banks will claim they were lending even during the financial crisis.

But the irony is that many banks lend to non banks precisely to invest in corporate debt. In fact, it’s one of the growth stories for banks who solicit factors, hedge funds, etc. for credit lines.

Will companies obtaining credit from non banks use them again?

According to Greenwich Associates survey, U.S. Companies Turning to Non-Bank Lenders For Credit, nine out of 10 companies that borrowed from these alternative lenders say they’ll look to tap non-bank providers for credit again in the future.  Not good news for banks.

Will banks lose other services to these non banks?

The threat is that you will not just be disinermediated for loans, but also things like cash management, payables processing, payroll, FX services, etc.

We have already seen public examples in the Purchase to Pay space of vendors and non bank partners, such as Nipendo and Integrate Financial, Tungsten and Blackstone, and Crossflow and Eaglewood capital.

Believe me, there are many more in the works.



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