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Whatever the case, shares of Western Alliance and Jefferies have tanked 11% and 14%, respectively, since Thursday. Morgan Stanley analysts downgraded their recommendation on Jefferies’ shares, citing the litigation.
Western Alliance is a relative pipsqueak, at roughly $8 billion in market value. Yet many similarly sized institutions have been swept up in the flood of lending to lightly regulated firms that the Federal Reserve labels “non-depository financial institutions.” Lending to these shadow banks has climbed to $1.9 trillion, up 180% from $680 billion in 2021, according to Fed data. This growth tracks the vertiginous rise of private credit and asset-backed lending, which have increasingly displaced traditional banks since the 2008 financial crisis. Providing leverage is a way to get a cut of the action back.
The question is how much risk this poses. Banks’ equity is a loss-absorbing buffer, taking the hit if loans go awry en masse. Yet 40 U.S. lenders with a combined $4.7 trillion in assets now have lent the equivalent of more than 100% of their total equity capital to shadow banks, up from 29 banks holding $1.1 trillion two years ago, according to data from KBRA Financial Intelligence. Nearly all borrowers are current on their payments, and much of the activity relates to the mortgage market, which enjoys effective government support. Yet the territory in which cockroaches can breed is growing.
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Editing by Jonathan Guilford; Production by Maya Nandhini
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Stephen Gandel is an award-winning journalist who has covered banking and financial markets for more than two decades. Prior to joining Reuters Breakingviews, Gandel had been the U.S. banking correspondent at the Financial Times for the past two years. He previously worked at The New York Times as the U.S.-based news editor of DealBook, the Times’ daily business newsletter, and was on a team of reporters who won an Emmy for live interviews. He was also a senior reporter for CBS News and a markets columnist for Bloomberg. Gandel spent 14 years at Time, working for Money, Time and Fortune magazines, where he was the only reporter to ever win the company’s Luce award four years in a row. His work was also recognized with a SABEW Best in Business award, and an Excellence in Journalism award from the NYSCPA. He is a graduate of Washington University in St. Louis, and lives in Brooklyn with his wife and two children.
First Brands row hints at banks’ shadow exposure
