Han Dieperink: Growth in private credit is mainly a concern for traditional banks

Han Dieperink: Growth in private credit is mainly a concern for traditional banks

June 18, 2024

Private Debt Banks
Han Dieperink

This column was originally written in Dutch. This is an English translation.

By Han Dieperink, written in a personal capacity

The markets for private credit are growing rapidly and regulators such as the International Monetary Fund (IMF) are growing increasingly concerned. Analysts and journalists hear 'alarm bells' going off and comparisons with the 2008 financial crisis are never far away.

This is also the case in the article 'Private credit has been popular in recent years, but now the alarm bells are suddenly going off' by Arend Clahsen and Joost van Kuppeveld, which appeared on Thursday 6 June in Het Financieele Dagblad. The lobby of traditional banks in particular seems to have reason to sound the alarm.

The IMF is not the first party to speak out about private credit. A market that has quadrupled within ten years from approximately $500 billion to more than $2 trillion is cause for concern for traditional major banks. They have been complaining for some time that they do not have a level playing field with private credit – private loans from institutional investors and investors to companies – and are therefore trying to denigrate this asset class. Last year, the Bank of England pointed out that companies with a lot of debt in the form of private credit are often sensitive to higher interest rates. The interest rate risk does not lie with the lender, but with the recipient.

Banks more vulnerable

The reason for the strong growth of private credit is the stricter supervision of banks. Where private credit grows, lending through banks shrinks. This is the result of more rules and higher capital requirements in the context of the Basel guidelines, which were drawn up after the 2008 financial crisis to strengthen supervision of the banking sector and banks' risk management.

The big difference between financing by a bank and financing via private credit is that a bank is much more vulnerable than financing via private credit. A bank works with its balance sheet, which means that the percentage of equity is always relatively small and a bank permanently suffers from a bad balance sheet. This strong leverage makes banks very sensitive to credit losses. Supervisors are trying to prevent this through the Basel guidelines. In private credit, investors generally do not use leverage, which benefits stability.

The consequence of the stricter rules from Basel is that simple credit from a bank is less easily available, because banks no longer comply with the new rules. Loans to SMEs, bridging loans, financing of project development: suddenly everything no longer runs as smoothly as before. In addition, loans are increasingly standardized and the previous flexibility has disappeared. The IMF now wants private credit, just like the banks, to come under supervision. Yet the IMF cannot indicate in the April report that there is a crisis in private credit, which continues to benefit from the regulatory pressure that slows down the major banks.

 

  

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