Stay informed with free updates
Simply sign up to the US banks myFT Digest — delivered directly to your inbox.
US bank lending to buyout firms and private credit groups has helped fuel a steep rise in loans to non-bank financial institutions, even as regulators fret that growing ties between the two sectors could become a systemic risk.
Loans to non-banks reached approximately $1.2tn by the end of March, according to a report by Fitch Ratings, a 20 per cent increase year on year driven by lending to the private capital industry. Commercial loans were up just 1.5 per cent during the same period.
The increase comes as regulators home in on the interconnectedness of banks to private equity and the fast-growing private credit sector, an opaque area of the market that has relatively little regulatory oversight. Regulators have asked banks to disclose more information about their relationships with so-called NBFIs to get a better overview of their exposure to the sector.
Fitch data shows that bank loans to NBFIs have risen since the start of the pandemic, from approximately $600mn at the end of 2019 to over $1tn at the start of this year, as businesses have increasingly turned to private credit for funding.
That has put private credit firms in direct competition with banks while also turning them into some of their most important clients by providing the leverage that helps boost returns. Banks also have complex and layered relationships with buyout groups, some of which operate the largest private credit companies.
Borrowers that source funding from private credit funds and direct lenders are typically riskier and more levered. As some of these loans are made with money borrowed from banks, there are concerns that bad credit could bleed through to the broader financial system.
The Fitch report states that for now a downturn in the private credit sector is “unlikely to have widescale financial stability implications for the largest banks”. However, it cautions that it is difficult to fully assess the risks and that “second order effects are more difficult to quantify”.
The IMF warned in its Global Financial Stability Report last month that increased lending to NBFIs by banks “could make the financial system more vulnerable to high levels of leverage and interconnectedness”. It also highlighted that more than 40 per cent of borrowers from private lenders had negative free cash flow at the end of last year, up from 25 per cent three years prior.
Most of the exposure to NBFIs is concentrated among 13 banks, including JPMorgan Chase and Wells Fargo. Categories 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 only recently started to break down their loan books by asset classes in quarterly reports filed with the Federal Deposit Insurance Corporation.
JPMorgan was an outlier among the largest banks last quarter by labelling $133bn of its lending to non-banks as “other” instead of breaking it down by type of borrower. But America’s largest bank has since provided more detail on its private credit and private equity loans and unfunded commitments.
“Robust growth in bank lending to non-banks warrants close monitoring as historically excessive growth in credit has led to asset quality problems that negatively affect banks,” the report concluded. But it added that bank exposure to non-banks is typically better than lending to the underlying borrowers.
