Nonbank Lenders Pose Risks to Traditional Banks as Private Credit Surges

Coming into 2024, PYMNTS spotlighted the appeal of private credit, also known as private debt, issued to corporates, and which offered up, and still offers, a capital lifeline to sustain operations.

Traditional channels, chiefly through banks, have been tightening their lending activities, particularly to smaller firms, and that activity had been down double-digit percentages through the past several quarters. The areas impacted included term loans and new lines of credit.

PYMNTS Intelligence found 47% of small and medium-sized businesses (SMBs) with annual revenues of $10 million or less had access to business or personal financing. That leaves roughly half without access, and 8% of SMBs have access to only personal financing. PYMNTS Intelligence’s “What’s Next in Credit: How Lack of Credit Access Impacts SMBs” found that 6 in 10 SMBs are denied access to the funding they need.

By the end of last year, Goldman Sachs was reportedly aiming to double the size of its $110 billion private credit business. As spotlighted here, JPMorgan Chase is reportedly moving deeper into the uber-popular world of private credit, with the banking giant said to be earmarking more than $10 billion for direct lending, while forming a partnership with asset managers to join it in private credit deals.

As reported by the Federal Reserve Bank of New York on Tuesday (June 18), authors Viral V. Acharya, Nicola Cetorelli and Bruce Tuckman wrote that non-bank financial intermediaries (NBFIs) have grown through the past decade. The share of assets held by the NBFI sector has grown from about 44% in 2012 to about 49% as of 2021, while banks’ share has declined from 45% to 38%.

And yet those nonbanks are dependent on banks for the key lifeblood of funding and liquidity, as detailed in the report titled “Banks and Nonbanks Are Not Separate, but Interwoven,” and where the central bank has estimated that the credit line commitments to nonbanks stands at about $1.5 trillion, with investments ranging from mortgage-backed securities firms to private equity firms to warehouse financing to asset-backed securities firms.

Interwoven Risks

“The common view is that banks and NBFIs operate in parallel, performing different activities, or they act as substitutes of each other, performing substantially similar activities, with banks inside and NBFIs outside the perimeter of prudential regulation. We argue instead that NBFI and bank activities and risks are so interwoven that they are better described as having transformed over time rather than as being unrelated or having simply migrated from banks to NBFIs,” noted the Fed in the June 18 posting.

Because banks have faced tightening capital requirements, the corporate and real estate loans that would traditionally be held by the banks are now, on an increasing basis, being held by the nonbanks.  The banks, in the meantime, have indirect exposure to NBFI lenders, such as via senior loans to private credit companies or collateralized loans to mortgage real estate investment trusts.

“Thus, the banks’ risks have transformed from exposure to the loans into exposures to NBFI balance sheets,” per the report.