A review for the Australian Securities and Investments Commission (ASIC) by industry veterans Nigel Williams and Richard Timbs found banks are increasingly providing subscription and net asset value facilities to private credit managers, and in some cases originating loans that are then taken up by private funds.
Banks are also divesting or tranching loan exposures to private credit providers, either directly or into warehouses, the report highlighted.
These arrangements allow banks to retain exposure to the $200 billion sector without breaching the capital constraints that made direct lending to developers and highly leveraged corporates less attractive after the global financial crisis.
“Through lending to private credit, banks can retain indirect exposure to private credit assets without tying up valuable bank capital,” the report said.
“This is lower-risk lending than direct lending, attracting lower capital weightings for prudential regulatory purposes.”
Moody’s has tracked a similar pattern overseas, estimating that by the end of 2023, global banks had committed about US$525 billion to private credit funds – a small share of their balance sheets but a growing one.
Moreover, citing data from the Federal Reserve, the report said in the US, banks represent a non-trivial portion of private lenders’ liabilities.
Williams and Timbs said these links are becoming more common in Australia, too, where “much of the bank lending to private credit is to facilitate liquidity and is typically secured and more senior ranking in claims against fund assets than investor claims”.
The authors cautioned that while the market has functioned smoothly in a benign environment, the resilience of these arrangements has not been tested in a downturn.
“Private credit should be regarded as complementary to bank and public market bond funding, with a different risk appetite and fewer terms and conditions,” the report said.
But whether the growing links between banks and private lenders strengthen the system or create new fault lines will only become clear in the next credit cycle.
As such, the authors advised ASIC to pay closer attention to “increased bank exposure to private credit through partnerships and funding”.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
