Federal Reserve sharpens focus on US banks' private credit exposures, Bowman says

The Federal Reserve began collecting data from banks to get a clearer picture of how their funding was used in private credit, Federal Reserve Vice Chair for Supervision Michelle Bowman told lawmakers on Thursday, signalling a stepped up supervisory focus on a growing segment of nonbank lending.

FED ACTIONS AND DATA COLLECTION

Bowman said the Fed had introduced the data-collection effort last month "to understand exactly where those investments are going outside of the banking system", adding that "a number of opacities" exist between bank involvement and where funding ends up in the nonbank space. Bowman, who testified to the House Financial Services Committee, raised the data collection as lawmakers expressed concern over a lack of information on banks' exposure to private credit; Rep. Ritchie Torres asked whether an April letter the Fed sent to US banks about their private credit exposure was "an admission that the Federal Reserve has insufficient visibility".

"We have seen a rise in the investment from banks into NBFIs in particular, but it's been very difficult for us to have a clear understanding of where those funds have been flowing," Bowman said.

Moody's has estimated US banks' private credit exposure at about $300 billion, part of more than $1.2 trillion in loans to non-depository financial institutions; the Financial Stability Board puts the global private credit market at about $2 trillion.

IMPLICATIONS FOR BANKS AND MARKETS

Bowman said private credit was still a "very small proportion of the lending categories within the banking system", but "something that we need to know more about because it's very opaque". Bowman said the data collection would give the Fed a much better view of where vulnerabilities might lie.

She referred to "bankruptcies and challenges last fall with several private credit funds" and, asked how to frame the problem, pointed to underwriting quality.

Moody's has said banks "ceded significant lending turf to alternative asset managers on the back of more stringent regulations following the 2007-08 financial crisis". Bowman said regulators were using some of the capital rules, especially Basel III, "to bring some of that activity back into the banking system so that we have a much better view and an ability to supervise that activity".

JPMorgan Securities analyst Vivek Juneja wrote in a note on 5 June that "opaqueness in private credit remains a big challenge".

Sources: Banking Dive