Commercial Banks Increased Exposure to the Private Credit Market
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Private credit involves nonbank financial institutions direct lending to private firms. It is a rapidly growing sector of the financial markets. According to McKinsey & Company, private credit “totaled nearly $2 trillion by the end of 2023, roughly ten times than it did in 2009”. Private credit increased in popularity following the Great Financial Crisis after which commercial banks came under increased regulation. But US commercial banks have steadily become involved in the private credit market indirectly. Banks have done this by increasing their lending to nonbank financial institutions, the institutions that make the direct loans to businesses.
Chart 1 shows the steady growth in commercial bank lending to nonbank financial institutions starting in 2015 (when the series first became available form the Federal Reserve). In January 2015, commercial bank loans to nonbank financial institutions were 4.2% of commercial banks’ total loans and leases. By February 2025, this percentage had risen to 9.4%.
Chart 1
Historically, a rapidly growing financial asset category, such as private credit, runs into a correction. One sector of the economy that could be the catalyst for a correction in the private credit market is household spending. Delinquencies are rising in the areas of auto-loan and credit card debt, as shown in Chart 2. These delinquencies are likely to lead to more restrictive terms for new credit in these sectors. Moreover, current household borrowers may cut back on their general spending in order to service their outstanding debt. If the tariffs threatened by the Trump administration come to pass, the higher cost of consumer goods and the downstream job layoffs that would likely occur also would adversely affect household spending.
Chart 2
The capital positions of US commercial banks are much improved compared to what they were just before the bursting of the housing/mortgage bubble in 2007. So, a bursting of the private-bubble would not have nearly the negative effect on the solvency of commercial banks as the bursting of the home-mortgage market did. But, given the US commercial banking system’s rising exposure to the private-credit market, problems in the private-credit market would have a negative impact on commercial banks, which would cause them to restrict their lending.
Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.
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