Banks’ $300B Private Credit Exposure Raises Systemwide Risk

Banks in the U.S. have piled into private credit lending, and Moody’s says the ride could get bumpy.

The ratings agency’s new report shows banks have lent about $300 billion to private credit providers. That’s part of $1.2 trillion in total loans to non-depository financial institutions (NDFIs).

That total now accounts for approximately 10.4% of all U.S. bank loans — nearly triple the 3.6% share from a decade ago. This shows the rapid growth of this corner of finance.

Banks also have $285 billion in loans to private equity funds, as of June of this year. Together, these exposures tie a significant portion of the banking system to private capital markets. These areas are more opaque to stress testing during economic downturns.

Private credit has become a significant driver of U.S. loan growth just as banks retreat from traditional sectors such as real estate and small business lending. But this rapid expansion also creates exposure to corners of the market that are harder to watch and regulate.

According to Moody, U.S. banks have lent nearly $300 billion to private credit firms, which accounts for about 10.4% of all U.S. bank loans.

As Moody’s puts it, the shift means banks are taking on more indirect risk — especially when they’re lending to the same non-bank companies that compete with them.

The largest 25 U.S. banks account for most of the NDFI loans. This leaves smaller lenders less involved. Large banks have more robust tools for managing credit risk. But their size means any shock could ripple across the financial system.

Wells Fargo tops the list of banks that lend to private credit providers, with about $59.7 billion in exposure. Bank of America and PNC are next in line.

Loans — even secured ones — can rapidly lose value from high interest and default rates. Prudence dictates that banks look closely at their risk exposures.

Private credit firms lend to businesses and individuals who may not qualify for traditional bank loans. That makes them essential for borrowers with thin credit files or subprime scores. But banks compete with and fund these non-bank lenders, which adds new risks that aren’t easy to track.

Moody’s warns that private credit financing can be challenging. On the one hand, it spreads risk across many companies. On the other, it hides dangers. Private credit firms often borrow heavily, making it harder for banks to accurately assess their risks.

Many banks may reconsider their loans. The reason is that when private credit borrowers falter, funding banks also face uncertainty. 

The risk may cause banks to hold more reserve funds and raise approval standards.