Moody's warns: US banks' loans to non-bank institutions increase by 26%, hidden systemic risks present

According to Fitch Ratings data, the US banking industry is increasing its credit exposure to private credit companies, private equity firms, and hedge funds. As of November, loans to these non-bank financial institutions have increased by 26% year-on-year. Fitch analysts cited Federal Reserve data in a report released on Monday, stating that as of November 26, US domestic banks had added approximately $363 billion in loans to non-bank institutions, while other types of loans had increased by $291 billion. Fitch stated that regulatory capital requirements and strong borrower demand are the main reasons driving banks to increase lending to non-bank institutions. However, this expansion of risk exposure also poses potential risks for banks, as their connections with the private credit and private equity industries become increasingly intertwined. For banks with assets exceeding $100 billion that are required to disclose their risk exposure to non-bank entities by category, Fitch stated that as of the end of the third quarter, private credit instruments accounted for 25% of their total loans to non-bank institutions, while mortgage loans and loans to private equity firms accounted for 23% each. The banking industry has particularly fueled the expansion of the $1.7 trillion private credit market. Critics have pointed out that if this market experiences a downturn or if the credit conditions of underlying borrowers worsen, it could exacerbate shocks to the banking system. Earlier this month, US Senator Elizabeth Warren urged regulatory agencies to strengthen their oversight of the private credit market and conduct stress tests similar to those conducted by the Bank of England. Fitch stated that it currently does not believe that risks related to private credit have a systemic impact on banks, but given the opaque nature of this market, it is difficult to conduct a comprehensive evaluation of the financial stability risks it may pose. Fitch pointed out that large banks have a "high degree of control" over their direct risk exposure to non-bank entities, but for the 20 banks with the most concentrated lending to non-bank entities, their ability to withstand risks during a downturn in this industry is limited.