Lending to shadow banks by U.S. banks is far outpacing growth in traditional commercial lending, more closely linking their fortunes and potentially creating an emerging risk, says Fitch Ratings.
In a new report, the rating agency said loans from banks to non-bank financial institutions rose 20% year over year as of March 31, compared with 1.5% growth in commercial lending over the same period.
The non-bank lending category includes collateralized loans to mortgage companies, REITs, insurance firms, finance companies, private funds and securitization vehicles. Fitch said most of the lending in this category is coming from large U.S. banks.
These exposures are expected to continue growing, the report said, driven by loans to private equity and private credit.
At the same time, Fitch said the rapid increase in bank lending to non-banks “warrants close monitoring, as historically excessive growth in credit has led to asset quality problems that negatively affect banks.”
On its own, a downturn in private credit is unlikely to pose large-scale financial stability risks for major banks, Fitch said, as direct exposure averages less than 30% of equity.
However, the risks may be difficult to gauge due to “the market’s inherent opaqueness” and the challenge of quantifying “second-order effects,” the report said.
For now, bank credit quality appears solid, Fitch said, though performance could deteriorate if economic conditions worsen, rates rise significantly or borrowers face liquidity issues.