Nonbanks' rapid growth poses risks to industry: FDIC's McWilliams

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WASHINGTON — The head of the Federal Deposit Insurance Corp. warned Thursday that the agency is closely monitoring banks’ exposure to loans shared with nonbanks, particularly as mortgages have moved outside the banking system.

Bank lending to nonbanks has skyrocketed to $376 billion as of the second quarter from $56 billion in 2010, a 571% jump, FDIC Chairman Jelena McWilliams said during a conference on financial stability at the Treasury Department.

“While mortgage origination activity has migrated to nonbanks, a portion of that risk remains with banks or could be transmitted back to the banking system through other channels,” she said.

McWilliams noted a similar pattern in mortgage servicing, where nonbanks accounted for 41% of servicing rights held by the top 25 servicers in 2018, up from 5% in 2009.

Part of the explosive growth in the nonbank space can be attributed to rapidly evolving technology and fintech firms offering easier ways to get loans online or through mobile devices, she said.

But McWilliams stopped short of suggesting that new technology at banks and fintech firms creates greater risk in the financial system.

“As we look at the migration of activity away from banks, regulators and policymakers should consider the risks and benefits,” said McWilliams, who is also on the Financial Stability Oversight Council. “Part of that process is asking questions: What happens to the systemic risk in the financial system when banking activities migrate to nonbanks? Are prudential banking and market regulators adequately positioned to deal with such shifts? How much exposure do banks have to nonbanks engaged in traditional banking activities?”

Another question McWilliams is looking into is whether to allow fintechs to become more banklike by obtaining an industrial loan company charter from the FDIC.

Several online lenders and fintech companies have applied for an ILC but withdrew this year with the intention of resubmitting later. It’s unclear exactly what caused the companies to withdraw their applications, but McWilliams said Thursday in response to questions that part of the process is weighing how much risk fintechs pose to the banking system.

“I am holding my opinion on whether or not fintechs represent systemic risk,” she said. “They represent some type of a risk to the system but we need to know what it is. And before we label it as ‘systemic,’ we need to know exactly which entities are we talking about" and "what type of activity are they doing.”

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