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Shadow Banks Could Take $11 Billion Annual Profit, Goldman Says

The U.S. shadow-banking system could take at least $11 billion of annual profit away from traditional lenders as competition intensifies over the next five years, according to analysts at Goldman Sachs Group Inc.

The emergence of non-bank lenders like asset managers and companies such as LendingClub Corp. and CommonBond Inc. is creating more competition for large banks, analysts Ryan M. Nash and Eric Beardsley said in a report. Tougher regulation, including capital rules and technological advances are driving the rise in shadow banking, they said.

“We expect the competitive landscape to shift over the next five to 10 years, with new entrants emerging and some activities moving out of the banking system,” the Goldman Sachs analysts said. “Banks earned about $150 billion in 2014, and we estimate $11 billion plus,” or 7 percent of annual profit could be at risk from these new sources of credit over the next five-plus years, it said.

Online lenders in the U.S. are challenging banks, which have dominated the loans industry historically. The startups tend to offer loans at lower interest rates than large banks because they operate with lower infrastructure costs and can reduce risk by gathering more information on borrowers and filtering out those most likely to default.

CommonBond, a New York-based online student-loan company, said on Feb. 5 that Nelnet Inc. invested an undisclosed amount, while providing at least $150 million to finance more loans. It’s the latest online lender to gain more funds, following the initial public offering in December of LendingClub, which helped pioneer the market for peer-to-peer borrowing.

“Emerging players will force the incumbents to change competitive behavior,” Goldman Sachs said. “We would expect pricing of products to adjust, driving potentially lower returns.”

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