Banks have reportedly more than doubled their lending to nonbank financial institutions (NBFIs) over the past five years and are now lending those companies $1 trillion a year.
This lending enables banks to profit from the growing share of lending that is being done by NBFIs, but it has also raised concerns among banking regulators, Bloomberg reported Thursday (March 27).
NBFIs like private equity firms, hedge funds, private credit shops, mortgage lenders, student loan providers and real estate investment trusts, which are less regulated than banks, have filled a gap in the loan market that has been left open by banks since the financial crisis, according to the report.
By lending to these companies, banks can gain revenue while in theory being shielded from the risk of default, the report said. The NBFIs use these loans to finance their own loans to other companies.
Citizens Financial Group CEO Bruce Van Saun told Bloomberg that his bank is earning more money from lending to private equity customers than it has lost from competing with them, per the report.
At the same time, regulators have grown concerned that the growth in banks’ lending to NBFIs could expose the banks to liquidity or credit shocks, the report said.
In one action taken in response to these worries, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve started requiring banks to disclose more detailed information about their exposure to NBFIs, according to the report. This requirement was implemented earlier this year.
The Federal Reserve said in June that nonbank lenders are dependent on banks for the key lifeblood of funding and liquidity. It estimated at the time that the credit line commitments to nonbanks stood at about $1.5 trillion.
“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,” the Fed wrote in a June blog post. “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 NBFI.”
