Shadow banking in general has come back to life after getting hammered during the financial crisis, but one segment has been especially rampant.
Peer-to-peer (P2P) lending, in which loans are made privately through individuals who most often connect through a network of relatively new websites, has exploded over the past five years. It is now the fastest-growing sector of non-bank lending, according to an exhaustive Goldman Sachs report on the shadow banking industry.
The P2P industry had just $26 million in loan issuance back in 2009, as the worst of the banking crisis passed; but that figure now stands at a robust $1.7 billion. While that's still a fraction of the total $12 trillion in loans across the U.S., and even pales in comparison to the $4 trillion in total shadow bank loans, it represents a growth of 65 times during the period.
"Personal lending (installment and card) is likely to continue to see disruption as the benefits of a lesser regulatory burden, lower capital requirements and a slimmer cost structure [over time] drive pricing advantages for new players...leading to share moving away from traditional players," Goldman said in its report.
Broadly speaking, shadow banking refers to nonbank lending, with total liabilities in the industry put at $15 trillion. That's a decline from the 2007 peak of $22 trillion.
The name originated from former Pimco executive Paul McCulley, who used it to describe the myriad institutions that helped provide the easy-money financing that led to the subprime mortgage market crash, which in turn triggered the financial crisis.
While the term became a pejorative closely tied to the crisis, the industry has evolved.
As banks find themselves under tighter regulatory scrutiny, customers are turning back to nonbank lenders for financing. The shadow firms don't face the same regulatory burdens as banks, because they don't take deposits and are thus less constrained when making loans.