Shadow banks and consumer lending

Investment Analysis Clubs Macro Economic Trends and Risks
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“Shadow banks” are lenders that are outside the regulated banking system. They range from your neighborhood loan shark to giant managers of private-credit vehicles that could fund consumer lending like KKR.

The Macro economy floats on an ocean of borrowed money. The Federal Reserve tracks consumer loans from banks but doesn’t necessarily capture all the consumer borrowing from shadow banks. Since banks try to capture highly credit-worthy customers the many who are less credit-worthy may be borrowing from shadow banks. If the economy deteriorates and they begin to default it might not be immediately obvious.

https://www.wsj.com/finance/banking/consumer-loans-are-getting-harder-to-tallyand-the-risks-harder-to-gauge-29bfeb90?mod=hp_lead_pos6

Consumer Loans Are Getting Harder to Tally—and the Risks Harder to Gauge

Tracking borrowing gets complicated when more lending is funded beyond banks and public markets

By Telis Demos, The Wall Street Journal, Dec. 9, 2025

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Private credit is exploding onto the scene in what is known as alternative consumer lending. Analysts at KBW tallied up new private-credit funding deals this year for financial-technology firms in consumer lending and estimated that those deals could support nearly $140 billion in lending globally over the next few years. That is a big surge from under $10 billion in 2024, the analysts estimated….

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The usual places people look for status updates on borrower health—like the monthly performance of publicly available pools of credit-card or other loans, or regulatory tracking based on bank data—might miss what is happening with the types of borrowers who rely on privately funded kinds of lending….

Segmenting of consumers’ credit use could help explain some recent conflicting signals. For example, banks’ reports of strong consumer-credit performance have been a contrast to retailers’ reports of seeing more customers trading down or struggling to keep up. It may just be that the groups in focus don’t overlap as much as they did in the past…. [end quote]

The article has a long list of big buy now, pay later providers and private equity groups that act as shadow banks.

The new OBBBA tax law will put plenty of money into consumer hands next year via tax refunds. (Especially the new “senior bonus” deduction.) There’s no current indication of rising defaults.

But this is a metric that investors should be aware of.

Wendy

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True dat! It will be interesting to see how the recentish deregulation of leverage limits will play out.

"One thing that isn’t well understood is that private credit is propped up by traditional banks; Moody’s reported in October that banks have lent $300 billion to private credit firms. So if those firms go kablooey, it won’t stop short of the broader financial system, but cascade through the heart of Wall Street. Nevertheless, the banks complained to the regulators that they were losing business (to the very companies they were funding).

Given what we know about the crashes of 2008 and 1929, the right policy would be to bring the upstarts under the regulatory umbrella. But instead, last Friday the agencies agreed to the bankers’ demands to help competition by deregulating the banks and getting rid of the 2013 leverage limits. Now, dealmakers can play banks off against private credit entities for the best (most risky) terms. And banks can go beyond funding non-banks and set up their own non-bank affiliates. When the inevitable crash comes, government will bail out the insiders, leaving regular people to suffer the aftermath."

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