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Shadow banks, which are less regulated financial institutions, have received $1 trillion in loans from US banks in January 2023. This is a significant increase from the previous year, with outstanding loans to non-depository financial entities like private equity firms and hedge funds reaching $1.0024 trillion last month. The rise in lending to shadow banks has raised concerns among regulators over potential systemic risks as these institutions often have lower regulation and lend money to enterprises with higher returns but also much higher risks than what a regulated institution would be able to tolerate.

Since 2010, major banks including Citigroup and Wells Fargo have strengthened their ties with alternative asset lenders, contributing to the growth of this fast-growing business. However, experts warn that such loosely regulated financial institutions have exposed banks to lower-quality loans, which could potentially lead to further risk exposure for the banking sector as a whole. Despite this concern, lending volumes overall are growing at a slower rate, highlighting the importance of continued regulation and monitoring of the shadow banking industry.

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