Bank of America’s loans to acquisitions of companies and private credit groups help boost loans to non-bank financial institutions, even as regulators fear the link between the two sectors could become a systemic risk.
According to a Fitch Ratings report, non-bank loans were about $120 million by the end of March, a year-on-year increase of 20% driven by the private capital industry. During the same period, commercial loans rose only 1.5%.
This increase is an opaque market in the market where regulation is relatively small in regulation as regulators connect banks with private equity and the rapidly growing private credit sector. Regulators have asked banks to disclose more information about their relationship with the so-called NBFI to better outline their engagement with the industry.
Since the pandemic began, bank loans to NBFIS have increased from about $600 million at the end of 2019 to more than 1TN at the beginning of the year as businesses increasingly turn to private credit to get funding.
This makes private credit companies compete directly with banks, while also turning them into some of the most important clients by providing leverage that helps improve returns. Banks also have complex and layered relationships with the acquisition group, some of which run the largest private credit companies.
Borrowers who get funds from private credit funds and direct lenders are often more risky and leveraged. Since some of these loans are earned with money borrowed from banks, there are concerns that bad credit may bleed to the broader financial system.
The Fitch report notes that the downturn in the private credit sector is currently “not likely to have broad financial stability for the largest banks”. However, it warns that risk is difficult to adequately assess and that “second-order effects are more difficult to quantify.”
The IMF warned in its Global Financial Stability Report last month that the increase in lending to NBFIs by banks “could make the financial system more vulnerable to high leverage and interconnectedness.” It also stressed that at the end of last year, more than 40% of borrowers from private lenders had negative free cash flow, up from 25% three years ago.
Most of the people who are exposed to NBFI are concentrated in 13 banks, including JPMorgan Chase and Wells Fargo. Categories include mortgages, corporate and consumer credit intermediaries, as well as private equity funds, and other loans to financial institutions that do not deposit.
Bank of America only recently began breaking down its loan books through asset classes in its quarterly reports with Federal Deposit Insurance Corporation.
JPMorgan’s largest banks last quarter had an outlier, labeling the $133 billion it loaned as “other banks” instead of breaking it down into “others” by the borrower’s type. However, the largest U.S. bank has provided more details on its private credit and private equity loans and no-funded commitments.
"The strong growth in bank loans to non-banks guarantees close monitoring of asset quality issues that negatively impact banks, due to excessive credit growth in history," the report concluded. But it added that banks' exposure to non-banks is generally better than lending to underlying borrowers.