Fitch Warns: Bank of America Loans to Non-Bank Institutions Surge 26% Risk Exposure Hides Systemic Risks

The Zhitong Finance App learned that according to Fitch Ratings data, the US banking industry is increasing its credit investment in private equity firms, private equity institutions, and hedge funds. As of November, the size of loans to these non-bank financial institutions increased 26% year over year.

In a report released on Monday, Fitch analysts quoted data from the Federal Reserve and pointed out that as of November 26, US domestic banks had added about 363 billion US dollars in loans to non-bank institutions, while other types of loans had increased by 291 billion US dollars.

According to Fitch, regulatory capital requirements and strong demand from borrowers are the main reasons driving banks to increase lending to non-bank institutions. However, this expanded risk exposure has also brought potential risks to banks, making them increasingly closely linked to the private equity and credit industry.

For banks with assets exceeding $10 billion and requiring disclosure of risk exposure of non-bank entities by category, Fitch said that by the end of the third quarter, private equity credit instruments accounted for 25% of their total loans to non-bank institutions, while mortgages and loans to private equity institutions each accounted for 23%.

The banking sector, in particular, contributed to the expansion of the $1.7 trillion private equity credit market. Critics have pointed out that if the market declines or the credit conditions of lower-level borrowers deteriorate, it may exacerbate the turmoil in the banking system.

Earlier this month, US Senator Elizabeth Warren urged regulators to step up scrutiny of the private equity market and conduct stress tests based on the Bank of England's practices.

Fitch said that it currently does not believe that risks related to private equity credit have a systemic impact on banks, but given the opaque nature of the market, it is difficult to conduct a “comprehensive assessment” of the financial stability risks caused by it.

According to Fitch, the direct risk exposure of large banks to non-banking institutions is “extremely manageable,” but for the 20 banks with the highest concentration of lending to non-bank institutions, they “have limited risk resilience when the industry is declining.”