Banks bypass Fed rules to fund non-bank lending

New York

REGULATORS' efforts to rein in Wall Street's biggest banks are in danger of backfiring. Guidelines aimed at strengthening lending standards are shifting the market for high-yield credit to less-supervised loan funds, raising alarm last week from the Financial Stability Oversight Council. Because the funds don't have depositors, some of their money comes from Wall Street banks, leaving systemically important institutions exposed to risks that regulators had hoped to avoid.

Loans by non-banks such as KKR & Co and Apollo Global Management affiliates are a small part of the market, but they're growing. Direct-lending funds, which raise money from institutional investors such as pension funds and insurance companies, surged to a global record last year of US$29.9 billion, according to financial data firm Preqin. Loans by US business development companies, or BDCs, many of which have credit lines with banks, jumped to US$55 billion last year from US$17 billion in 2010, according to Deloitte LLP.