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US bank lending to buyout firms and private credit groups has contributed to a significant increase in loans to non-bank financial institutions. According to a report by Fitch Ratings, loans to non-banks reached approximately $1.2tn by the end of March, representing a 20% year-on-year increase driven by lending to the private capital industry. In comparison, commercial loans only saw a 1.5% increase during the same period.
Regulators are paying close attention to the interconnectedness between banks and private equity, as well as the rapidly growing private credit sector. This area of the market has relatively little regulatory oversight, prompting regulators to ask banks for more information about their relationships with non-bank financial institutions to better understand their exposure to the sector.
Since the start of the pandemic, bank loans to NBFIs have more than doubled from approximately $600mn at the end of 2019 to over $1tn at the beginning of this year. Businesses have increasingly turned to private credit for funding, putting private credit firms in direct competition with banks and making them some of the banks’ most important clients.
The IMF warned in its Global Financial Stability Report that increased lending to NBFIs by banks could make the financial system more vulnerable to high levels of leverage and interconnectedness. It also noted that over 40% of borrowers from private lenders had negative free cash flow at the end of last year, up from 25% three years prior.
Most of the exposure to NBFIs is concentrated among 13 banks, including JPMorgan Chase and Wells Fargo. These exposures include mortgage, business, and consumer credit intermediaries, as well as private equity funds and other loans to financial institutions that do not take deposits.
US banks have recently begun to break down their loan books by asset classes in quarterly reports filed with the Federal Deposit Insurance Corporation. JPMorgan was an outlier last quarter by categorizing $133bn of its lending to non-banks as “other” without specifying the type of borrower. However, the bank has since provided more detail on its private credit and private equity loans and unfunded commitments.
The Fitch report concluded that while the robust growth in bank lending to non-banks warrants close monitoring, bank exposure to non-banks is typically better than lending directly to the underlying borrowers. Stay informed about the latest developments in the financial sector by signing up for the US banks myFT Digest.
