To Bank, or Non-Bank?

The leaders of the top US banks went to Washington this week, but a big topic looming over the Senate hearing room was the booming private credit industry.

In their annual testimony to Congress , the CEOs warned that new banking rules would cause more money to seep into the less regulated world of private capital. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told lawmakers they should be worried that they are blind to “the next brewing crisis.” He argued that private credit firms were less likely to step up to help clients when tough times surfaced.

“Unlike large banks who value broader, holistic client relationships—willing to work through distressed situations—private market players are more likely to act transactionally as counterparties, not partners, during those events,” Dimon said in his prepared remarks , noting that the private credit market has roughly tripled since 2012, to $1.5 trillion. (JPMorgan’s assets, of course, are approaching $4 trillion .) He continued:

"It is not just the amount of lending being done by private market participants, but the size as well. In just the last few years, we have seen at least 50 loans of $1 billion or more go to the private markets, versus what would have historically been done by large banks. As this lending activity moves away from regulated markets, the likelihood increases that risks go unseen."

Before the hearing even took place, an industry trade group published a rebuttal to allegations such as Dimon’s. The president and CEO of the Managed Funds Association, Bryan Corbett, argued that private credit “enhances financial stability and empowers economic growth,” and is already regulated largely by the SEC. The MFA continued:

"The growth of private credit limits risks in the banking system because the capital provided by credit funds comes from institutional investors, not depositors with a government backstop. Increased scrutiny of private credit is misplaced."

It’s true that banking regulations after the 2008 financial crisis have caused critical money to drift from the likes of Wells Fargo and Bank of America toward nonbanks. (For example, none of the top three largest mortgage lenders in 2022 were big banks, according to an analysis by Bankrate.)

And this year you’ve seen private credit giants finance large corporations and buyouts at a scale never seen before.

I asked Ohio Senator JD Vance, a Republican who was previously an executive in private capital, whether he agreed with the bank chiefs. Such firms “have their place in the economy,” he said. “But you don’t want to artificially drive funds to private equity. One, because the liquidity is much less accessible and two, because that’s fundamental distortion of the market.”

He said he does expect more regulation of private capital, but when I spoke to other senators, the issue seemed up for debate. I pressed Senator Elizabeth Warren, a Massachusetts Democrat, for example, whether she would push for such regulations. She instead pivoted the conversation to the crypto industry, where she’s aggressively pursuing more anti-money-laundering rules.

(Perhaps she has bigger problems than private credit to pursue?)

In a separate conversation for Bloomberg Television with Sheila Bair, best known for steering the FDIC through the 2008 financial crisis, there were more concerns cited about the non-bank sector. "You have a lot of credit going into these private credit funds now, they're not subject to the same level of capital regulation," she said, calling for more transparency. "We don't really know what those risks look like in the non-bank sector." Though she said regulated banks should be required to ask more questions when interacting with non-banks through products like warehouse lines.

There’s an argument out there that private credit firms largely take money from big, institutional investors that lock up capital for a long period of time, making bank runs less of a risk. They don’t take depositor money, so a bailout would be less likely in the event of a crash. But as we’ve talked about , these firms are increasingly taking money from individual retirees, which could start to change the equation.

The word “systemic” is controversial around private capital , and the US Financial Stability Oversight Council is reconsidering its definitions. In the next 10 years, with new rules on the banking system, you can be sure the industry is bound to change a whole lot more. And it’s possible that regulators won’t take serious actions without a real calamity.

To read this newsletter online, you can do that here ! And to sign up for Bw Daily, for which I write every Friday, you can do that here . On Monday, I'll be interviewing serial dealmaker Brad Jacobs at the Economic Club of New York for a keynote, and then flying off to the other side of the world where I'll be for about two weeks. But always on e-mail, of course. Send all tips, opinions and ideas to [email protected] . Just don't call me, I'm not on your time zone ;).

Looking forward to ending the year with you, back in time for the holidays and anchoring through the final week of the year. We'll set you up the right way for 2024.

Sonali