With bank earnings in focus this week, it is natural that investors are looking at bank exposure to the private credit sector, which has been under stress as redemption requests proliferate.
Through the fourth quarter of last year, the 10 largest banks had a combined $257 billion in loans in private credit, which one would think the banks have effectively hedged and at least started to unwind. With about half of the major banks having released first-quarter earnings so far, the loans remain at a high enough level to raise questions.
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If the troubled loans in the private credit sector spill over into the major banks, it could pose a risk for the financial system and the real economy.
Based on data compiled by Bloomberg, U.S. bank exposure to private credit at the end of last year implies that domestic banks remain well capitalized and can absorb any losses, which should limit exposure to the broader financial system and the real economy.
Indeed, bank executives in earnings calls in recent days have sought to reassure investors that their exposure to private credit was limited and did not pose a meaningful risk to their operations.
But if there is a large liquidity event caused by an exogenous or unforeseen endogenous shock, the major banks’ exposure to private credit cannot be ignored.
Middle market impact
Investors’ concern extends beyond the biggest banks, though. The status of private credit is of paramount importance to middle market firms that can turn to such entities to quickly obtain capital at favorable terms when traditional banks might not be an option.
The role, status and health of middle market lenders such as JP Morgan as well as the number of private credit lenders that provide capital to firms with revenues between $30 million and $10 billion is in the interest of the American economy.
