How safe is your money in the US of A?
You do the hard yards, pay your taxes, follow all the rules and save for a rainy day (retirement) by putting your hard-earned savings into a traditional bank. And the said bank goes out and lends it to unregulated Shadow Banks to make more money?! Who is being fooled?
- Are they doing it? Yes. Traditional banks lend billions to private equity firms, hedge funds, and non-bank lenders (shadow banks). They also provide “credit lines” that these unregulated entities rely on to function.
Extraordinary policy measures have helped ease financial conditions and support the global economy, but they have also increased financial vulnerabilities. As economies recover unevenly, especially between advanced and emerging markets, risks such as stretched asset valuations, rising debt, and tighter global financial conditions may amplify instability. Several emerging markets remain exposed due to large external financing needs and the potential impact of higher U.S. interest rates [2].
Corporate debt remains elevated across many countries, and concerns over credit quality may weaken banks’ willingness to lend. Leverage that built up during the pandemic heightens future downside risks, requiring careful calibration of policy and macroprudential tools depending on each country’s recovery pace. Meanwhile, the commercial real estate sector shows emerging signs of overvaluation, which—combined with other vulnerabilities—raises the risk of sharp corrections that could undermine economic growth [2].
- Is it legal? Generally, yes. It is known as “Regulatory Arbitrage.” Banks act as the “plumbing,” lending money to shadow banks which then engage in riskier lending that traditional banks are restricted from doing directly. While regulators (like the Fed and ECB) issue warnings about the systemic risk, the core practice of lending to these firms is permitted.
In 2023, the non-bank financial intermediation (NBFI) sector grew by 8.5%—more than twice the growth rate of the banking sector—raising its share of global financial assets to 49.1%. This expansion was mainly driven by rebounding valuations of mark-to-market instruments and renewed investor inflows. Significant growth above 10% was recorded in jurisdictions such as Brazil, the Cayman Islands, Japan, Mexico, and the United States, while most advanced and emerging economies saw stable NBFI shares.
All major NBFI subsectors expanded at roughly double their five-year average pace. Other financial intermediaries (OFIs) grew by 9.4%, with insurance corporations and pension funds rising around 6–7%. Investment funds were the primary contributors to the overall growth of both the OFI segment and the broader NBFI sector [3].
- The Taxpayer Risk: Your bank deposits are insured by the government (FDIC in the US). If a traditional bank lends too much to a shadow bank that collapses (like Archegos Capital or similar events), the traditional bank takes a hit. If enough traditional banks take hits simultaneously, the government (and thus taxpayers) may have to step in to save the insured deposits [1].
A financial system is considered stable when banks, lenders, and financial markets can continue providing essential funding to households, businesses, and communities—even during unexpected disruptions or shocks. Because shocks cannot be reliably predicted, the Federal Reserve’s monitoring framework places greater emphasis on identifying vulnerabilities within the system. These vulnerabilities are conditions that can magnify stress during turbulent periods. The framework evaluates four broad categories of vulnerabilities and how they interact, helping policymakers assess whether the system is building resilience or moving toward instability [1].
Among the key vulnerabilities, valuation pressures occur when asset prices rise far above economic fundamentals, often due to heightened investor risk-taking, increasing the likelihood of sharp price corrections. Another major vulnerability is excessive borrowing by businesses and households. When debt levels become too high, borrowers risk financial distress during downturns, potentially forcing them to reduce spending. Such cutbacks can slow economic activity and lead to investor losses, amplifying stress throughout the financial system [1].
References:
[1] Financial Stability Report – November 2024, federalreserve.gov
[2] Global Financial Stability Report – 2024, imf.org
[3] Global Monitoring Report on Non-Bank Financial Intermediation – December 16 , 2024, fsb.org
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