Regulators’ efforts to rein in Wall Street’s biggest banks are in danger of backfiring, Bloomberg reported today. Guidelines aimed at strengthening lending standards are shifting the market for high-yield credit to less-supervised loan funds, raising alarm this week from the Financial Stability Oversight Council. Since the funds don’t have depositors, some of their money comes from Wall Street banks, leaving systemically important institutions exposed to risks regulators hoped to avoid. Loans by nonbanks are a small part of the market, but they’re growing. Direct-lending funds, which raise money from institutional investors such as pension funds and insurance companies, surged to a global record last year of $29.9 billion. Loans by U.S. business development companies (BDCs), many of which have credit lines with banks, jumped to $55 billion last year from $17 billion in 2010. Asset managers are reshaping the market for lending to midsize companies, some top U.S. bankers told the Federal Reserve Board earlier this month. Regulators have scrutinized large banks for risk, publishing strict guidance on leveraged lending in 2013. That’s allowing nonbank funds, many with ties to private-equity firms, to fill the void by helping finance buyouts and indebted companies. The credit sustains jobs and businesses, but it’s also operating beyond the oversight of bank supervisors.
