US Bank Lending to Competitors Surged 26% This Year, Fitch Says
TL;DR
US bank lending to non-bank financial institutions like private credit firms surged 26% this year, driven by regulatory factors and strong demand, but it raises risks due to increased exposure to these opaque markets.
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US banks are lending more to private credit firms, private equity shops and hedge funds, with loan volume to these non-bank financial institutions up 26% this year through November, according to Fitch Ratings.
Domestic banks made about $363 billion of new non-bank loans through Nov. 26, Fitch analysts wrote in a report on Monday, citing Federal Reserve data. Banks added $291 billion across all other loan types, according to Fitch.
Regulatory capital requirements and strong demand from borrowers contributed to the uptick in lending to non-banks, Fitch said. But the added exposure brings risk for banks, which are increasingly intertwined with the private credit and private equity industries.
For banks with more than $10 billion of assets, which are required to disclose exposures to non-bank entities across different categories, private credit vehicles accounted for about 25% of non-bank lending at the end of the third quarter, according to Fitch. Mortgage loans and lending to private equity each accounted for 23% of total loan balances.
Banks have been helping to fuel the growth of the $1.7 trillion private credit market in particular. Critics have voiced concern that any downturn in the market, or any deterioration in underlying borrower health, could exacerbate wobbles in the banking sector.
Earlier this month, US Senator Elizabeth Warren urged regulators to further scrutinize the private credit market and conduct stress tests – similar to those implemented by the Bank of England.
Read More: Bank Lending to Private Credit Funds Swells 145% in Five Years
Fitch said it doesn’t view risks associated with private credit as systemic for banks, but a “comprehensive assessment of financial stability risks” is difficult, given the opaque nature of the market.
For large banks, direct exposure to non-banks is “very manageable,” Fitch said. But for the 20 banks most concentrated to these institutions, they have “limited protection against a downturn for this sector.”