US banks could lose more than 7pc of their annual profits to the rapidly expanding group of non-bank financial intermediaries known as shadow banks, according to new research by Goldman Sachs.

Goldman analysts said the shadow sector was being buoyed by new technology, low interest rates and post-financial crisis regulation that has squeezed traditional banking businesses, with consumer, mortgage and leveraged lending especially vulnerable.

The rise of non-bank lenders could force a wave of repricing across a variety of financial products as banks are forced to respond to their competitors by lowering charges. At least $11bn of the $150bn in annual profits made by US banks are at risk, the analysts said.

While the term shadow banking originally referred to pre-crisis financial players such as broker-dealers and the repo market, Goldman analysts said they were focused on the ‘new shadow banks’ that have been expanding since the 2008 crisis. These include peer-to-peer lenders, which seek to use online platforms to directly connect borrowers with lenders, as well as private equity firms and investment funds that have recently been undertaking more traditional banking activities.

“The twin forces of regulation and technology are opening the door for an expanding class of competitors to capture profit pools long controlled by banks,” Goldman analysts Ryan Nash and Eric Beardsley wrote in the research.


The rise of non-bank lenders could force a wave of repricing across a variety of financial products as banks are forced to respond to their competitors by lowering charges


Faced with increased competition from less-regulated, fast-growing and more nimble shadow banks, traditional financial institutions are faced with a tough choice. “This opens the debate whether you are better to cannibalise yourself at the expense of your current business model or remain under attack,” the analysts said.

Alternatively, banks could also attempt to level the playing field by lobbying for tighter curbs on shadow banking rivals, they said.

There are signs of that happening in the leveraged loan space, where banks have been complaining to regulators that new rules curtailing their lending to junk-rated companies have forced the business to move to private equity firms and business development companies.

While the new shadow banks pose a direct threat to traditional banking businesses, they also create opportunities for Wall Street’s biggest institutions, many of whom are providing lines of credit or other services to P2P companies and other shadow banking players. Goldman was a lead underwriter on last year’s initial public offering of Lending Club, the world’s biggest P2P company, for instance.

“There’s a natural progression in the way the public responds to all innovation,” said Ron Suber, president of Prosper, the world’s second-biggest P2P lender.

“A mere ‘novelty’ becomes an ‘interesting new niche’, then a ‘great idea’ and then, ‘How did we ever get along without it?’”

Published in Dawn, Economic & Business, March 9th, 2015

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