U.S. banks’ loans to the nonbank financial sector exceeded $1.14 trillion in Q1 2025, with non-depository lending growing by an average of 26% annually since 2012 as “shadow banking” surges. “This interconnectedness between banks and nonbanks adds an extra layer of intermediation, as banks lend to mortgage companies, insurance companies, investment funds (such as mutual funds, money market funds, hedge funds and private capital funds), pension funds, broker-dealers, securitization vehicles and other financial entities, which then lend directly to end users in the economy,” noted the Fed. The growth rate of non-depository financial institutional lending has grown by 26% on average each year since 2012. Getting a bit more granular, the Financial Stability Board estimated late last year that the aggregate FinTech lending across seven jurisdictions came in at $38.5 billion. As the FSB elaborated, “FinTech lending platforms can act as auxiliaries or intermediaries. As auxiliaries, they can be in the form of a ‘marketplace platform,’ which is an online market that allows lenders to trade directly with borrowers (peer-to-peer lending and crowdfunding platforms). Fintech lending platforms can act as intermediaries when they use their balance sheets to originate the lending.” Loans to mortgage and private credit intermediaries each represent 23% of loans outstanding, and loans to business intermediaries and consumer intermediaries represent 21% and 9%, respectively, estimated the Fed. According to a report by the Congressional Research Service, “banks are increasingly lending to NBFIs (nonbank financial institutions) and, at the same time, reducing their lending to commercial and industrial borrowers.” “Increased lending from banks to NBFIs could expose banks to counterparty credit risk and spillover effects during a financial crisis…” the report added. “The size and growth of NBFI suggest that significant amount of financing is being intermediated and held outside of the banking sector. In contrast to the traditional banking model, where banks normally manage risks (e.g., credit, market, liquidity, and operational risks) on their balance sheets, the market-based NBFI financing model shifts risks toward capital markets investors and intermediaries.” As for the risks, the CRS cautioned that the “vulnerabilities affecting financial stability are present in capital markets NBFI, including in certain money-like instruments that face potential ‘runs,’ leverage levels, interconnectedness between nonbanks and banks, data and transparency issues, liquidity mismatch at certain open-end funds, and concentration risk at market intermediaries.” There’s a knock-on effect here, as some financial institutions are grappling with shadow banking stalwarts as competitors, which in turn has shifted activities away from core deposits toward long-term securities and other holdings.

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