Key Takeaways
- • Loans from banks to nonbank institutions, including private-credit firms, rose from $300 billion in 2016 to more than $1.5 trillion, now representing 11% of all bank loans outstanding, according to FDIC data.
- • Regulators are scrutinizing private credit: the European Central Bank expanded a probe into banks with exposures to the market, and the SEC issued a rare statement on fair value in private assets.
- • The Bank of England's September Financial Policy Committee said private credit could be vulnerable to worsening financial conditions.
- • Investor redemptions in some private-credit funds reached nearly 40% of a single fund in one quarter, though most funds capped withdrawals at 5%.
- • Redemption rates have declined at many private-credit firms and some investors have returned to software deals.
Summary
Banks, which pulled back from risky lending after the 2008 financial crisis, have increasingly re-entered the credit market by lending to the private-credit firms that filled that gap. According to FDIC data cited by Semafor, loans to nonbank institutions grew from $300 billion in 2016 to more than $1.5 trillion, now accounting for 11% of all bank loans outstanding. Because these bank loans are backed by the private-credit firms' own loan portfolios, regulators have grown concerned about the resulting layered debt exposure.
The scrutiny is spreading across jurisdictions. The European Central Bank recently expanded a probe into private credit, examining banks with exposures to the market. In the United States, the Securities and Exchange Commission last week released a rare statement on fair value in private assets, reminding lenders to be rigorous in their valuations and disclosures. The Bank of England, in its September Financial Policy Committee meeting, warned that private credit could be vulnerable to worsening financial conditions after stress-testing the resilience of private markets.
The sector came under pressure earlier this year when investors grew worried about funds' exposure to software companies, which appeared vulnerable to disruption from artificial intelligence. Investors in certain fund types sought to withdraw capital at record rates, in some cases requesting nearly 40% of a single fund in a quarter, though most funds limited redemptions to 5%.
Private-credit lenders have long faced criticism over how they mark their loans, particularly where valuations diverge across lenders or where borrower underperformance is not reflected in marks. Lenders say they rely on third-party evaluators to set marks and that they invest carefully. Redemption rates have since declined at many private-credit firms, and some investors have returned to software deals as more borrowers find financing both inside and outside the private-credit market.
The scrutiny is spreading across jurisdictions. The European Central Bank recently expanded a probe into private credit, examining banks with exposures to the market. In the United States, the Securities and Exchange Commission last week released a rare statement on fair value in private assets, reminding lenders to be rigorous in their valuations and disclosures. The Bank of England, in its September Financial Policy Committee meeting, warned that private credit could be vulnerable to worsening financial conditions after stress-testing the resilience of private markets.
The sector came under pressure earlier this year when investors grew worried about funds' exposure to software companies, which appeared vulnerable to disruption from artificial intelligence. Investors in certain fund types sought to withdraw capital at record rates, in some cases requesting nearly 40% of a single fund in a quarter, though most funds limited redemptions to 5%.
Private-credit lenders have long faced criticism over how they mark their loans, particularly where valuations diverge across lenders or where borrower underperformance is not reflected in marks. Lenders say they rely on third-party evaluators to set marks and that they invest carefully. Redemption rates have since declined at many private-credit firms, and some investors have returned to software deals as more borrowers find financing both inside and outside the private-credit market.
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