Loans to Nonbank Lenders Top $1 Trillion Amid New Scrutiny

Lending to nonbank entities like buyout firms and private credit outfits has topped $1 trillion.

As the Financial Times (FT) reported Monday (May 19), this trend is happening amid concern by regulators that the connections between banks and their nonbank counterparts could present a systemic risk.

The report, citing data from Fitch Ratings, said loans from banks to nonbank financial institutions (NBFIs) totaled roughly $1.2 trillion at the end of March, up 20% from last year and driven by lending to private credit firms.

That data shows that, since the pandemic’s start, bank loans to NBFIs have gone from approximately $600 million at the end of 2019 to over $1 trillion when this year began, as businesses increasingly seek private credit funding.

However, the FT added, borrowers who look to private credit and direct lenders for funding tend to be riskier and more levered. As some of these loans are made with funds borrowed from banks, there are concerns that bad credit could infect the wider financial system.

The FT also cites a report from Fitch saying that a downturn in the private credit sector is “unlikely to have widescale financial stability implications for the largest banks,” at least in the short term. Still, Fitch said it’s hard to fully assess the risks and that “second-order effects are more difficult to quantify.”

The news comes weeks after the International Monetary Fund (IMF) released a report showing that more than 40% of the companies that borrowed from private lenders ended 2024 with negative cash flow from their operations.

“The risk of earnings erosion and cash flow problems has increased, with idiosyncratic pockets of risk in some industries or borrowers,” such as healthcare and software, the IMF wrote about direct lenders (DLs).

“Even before the tariffs, nearly half of DL borrowers had negative free operating cash flows, prolonging their reliance on payment-in-kind provisions and amend-and-extend restructurings.”

Meanwhile, a recent Federal Reserve Bank of Boston report found that large banks’ total loan commitments to private equity and private credit funds were approximately $300 billion, or 14% of large banks’ total lending to NBFIs, as of the end of 2023. That figure was less than $10 billion in 2013.

The central bank argued that “understanding the scale and complexity of bank-NBFI connections is important for identifying potential risks to financial stability — that is, the financial system’s ability to continue supplying capital to the economy if strained by shocks.”