The ongoing proliferation of non-financial services financial services

Non-bank lenders have played a large role in the US mortgage market for many years, with the ability to generate fee income from originations and servicing while selling the loan to the GSEs or on the secondary market to reduce risk exposure and free balance sheet capacity.

Now, as reported in The American Banker, non-bank US lenders have an equal share of the commercial and industrial loans market. In addition, banks have increased their loans to non-bank lenders. With no GSE backstop to sell loans to, and “simpler’ application processes which may lack the rigor of bank credit processes, does this increase systemic risk in the market? Also, with non-banks paying a higher cost of capital, will this dynamic ultimately increase borrowing costs for small and mid-sized businesses?

Banks have seen an increasing number of alternatives ‘park their tanks on their lawn’ in recent years and, while some digital-only banks have found the regulatory demands challenging, the number of new market entrants across the financial spectrum continues to grow. It’s yet another example of the ever-growing power of the consumer – looking for goods and services entirely on their terms. But, free from the rigorous regulation of the traditional financial sector is there a growing risk that the crisis of 2008/2009 has become an afterthought and history will repeat itself?