Private Credit Sector Could Benefit From New Bank Capital Rules

That’s according to a report Wednesday (March 25) from the Wall Street Journal (WSJ), which noted that an “obscure” bank capital regulation has already helped foster the growth of non-bank lenders such as private credit outfits.

Now, U.S. regulators are working on new capital rules designed to promote more bank lending. The rationale is that stricter capital rules for banks—put in place after the 2008 financial crisis—have helped drive more non-bank lending, like the trillion-plus dollar private-credit market.

However, the WSJ added, some of the changes could also lead banks to lend even more money to non-bank entities, challenging the notion that banks and private capital managers are at odds with each other.

The reason: some bank lending to other lenders can also possibly be viewed under new capital rules like a securitization.

While securitizations of private loans aren’t necessarily sold off to investors, they hold some crucial similarities, the report said. For example, the bank will lend against a special entity carrying loans as collateral, and it will lend out part of the underlying collateral’s value.

“With this cushioning, along with other features, such lending can be viewed under the capital rules as the bank having a more senior ‘tranche’ of exposure, making the treatment for this lending less risky than the underlying loans themselves would be,” the WSJ report said.

The current rules say that the lowest risk weighting a bank’s securitization exposure qualifying for this treatment could receive is 20%. The new capital proposal would bring that number down to 15, the report added.

The changes come at a time when private credit has shifted from a “contest of who can originate loans to a “test of who can move them,” PYMNTS wrote earlier this week.

Some recent developments highlight this evolution. As covered here last week, Stone Ridge Asset Management has told investors it would meet only 11% of redemption requests in one of its private credit funds after a surge of withdrawal demands.

The fund holds consumer and small business loans from FinTech companies that include Affirm, LendingClub, Upstart, Block and Stripe, a signal that liquidity pressure is not fixed to a single asset class.

At the same time, Bank of America has cautioned clients about exposure to private credit by offering a basket of European financial stocks positioned against firms “most exposed to private credit shocks,” pointing to potential downside risk. Private capital firms such as Blue Owl and Blackstone have also witnessed steep declines in market value amid rising investor unease.