Regulators Look Closer at ‘Shadow Lending’ Following SVB Crisis

Could the next financial crisis spring from the world of “shadow lending?”

It’s something regulators and bankers are concerned about, Bloomberg News reported Monday (March 27), citing a series of interviews with financial experts.

The report notes that questions about the possible threat became more immediate following the collapse of Silicon Valley Bank earlier this month, as it was a top financier of venture capital and private equity funds.

The same was true for Credit Suisse Group, which also ran into trouble this month before being acquired by rival UBS backed by the Swiss government. Though neither bank’s troubles were the result of those debts, the concern is they could have led to a larger contagion without government support, Bloomberg said.

One official told the news outlet that the recent crisis in the banking world will likely trigger a closer look at shadow lending, which includes credit issued by private equity companies, retirement funds and insurers.

A deeper investigation into the matter will mean determining where the risk ended up when it moved off banks’ balance sheets, as well as the risk to banks from loans issued to buyout firms, the source said.

As PYMNTS wrote earlier this month, the banking crisis has shown corporate treasurers and chief financial officers (CFOs) that the argument that midsize banks pose no systemic risk no longer holds up.

It has made companies more concerned about where they can keep their cash, and brought corporate risk frameworks and working capital management strategies into sharper focus.

Charlie Youakim, CEO of payments company Sezzle, told PYMNTS in an interview recently that following the government takeovers of SVB and Signature Bank, the conversations he’s having with his board and finance department have moved to “where businesses are banking next, and bank fundamentals.”

Although large financial institutions holding more than $250 billion in deposits are subject to tough regulatory oversight, roughly half of U.S. bank deposits are held in regional banks that — at least for now — are managed with a lighter regulatory touch.

With that in mind, businesses are now doing more diligence on what banks they are using to keep their deposits or partner, with many responding to the rapid collapse of SVB by shifting their money to some of the largest U.S. banks.

“We’re putting together a report of what [our] banks look like, their financial stability … because it’s not the case anymore that you can just trust your bank, trust that your money will be safe,” said Sezzle’s Youakim.