NY Fed scrutinises bank lending to private credit firms after JPMorgan writedowns

Closer supervisory scrutiny may lead banks to exercise greater caution in lending against private credit collateral, which would constrain funding for nonbank lenders and possibly lift borrowing costs for the mid-sized firms that depend on them. Banks with substantial lending to nonbank financial companies could face additional queries about disclosure and collateral valuations in the coming earnings season. The connection between software loan risks and AI disruption opens a fresh route through which weakness in the tech sector could transmit to credit markets. The review also comes at a time when broader risk assets appear complacent relative to tension in sovereign bonds, so any sign of trouble in private credit could intensify pressure on credit spreads.

The Fed is calling on Wall Street to verify what genuinely underpins over $1.5 trillion in bank loans extended to shadow lenders.

Summary:

• According to Semafor, the New York Fed has been scrutinising big banks' lending to private credit firms since spring.
• Officials held meetings with JPMorgan, Wells Fargo, Barclays and Morgan Stanley, concentrating on exposures, risk management and the quality of collateral.
• The examination stems in part from JPMorgan's March writedowns of loans to private credit firms, especially software loans considered susceptible to AI.
• At certain banks, including JPMorgan, the reviews have already concluded. Both the Fed and the four banks declined to comment.
• Bank credit to nonbank institutions has climbed from roughly $300 billion in 2016 to above $1.5 trillion, representing about 11% of total bank loans.
• These visits came after the Fed asked banks in April for exposure data, while the Treasury concurrently questioned insurers.

The New York Fed has been looking into how much some of the largest banks are exposed to private credit companies, according to a Semafor report (gated), a sign that regulators are paying closer attention to one of the fastest-growing areas of the financial system.

Since spring, Fed officials have met with JPMorgan Chase, Wells Fargo, Barclays and Morgan Stanley, pressing them on their total exposure to private credit lenders, risk management procedures and the quality of collateral supporting the loans, the report stated. At some banks, including JPMorgan, the reviews have already wrapped up. The Fed and the four institutions declined to comment.

The probe was in part triggered by JPMorgan's move in March to reduce the value of loans extended to private credit firms, especially loans to software companies considered exposed to AI disruption. Since these loans act as collateral when private credit funds secure bank financing, the writedowns diminished the funding accessible to the lenders themselves.

The magnitude of the connections between banks and nonbank lenders accounts for this attention. Bank lending to nonbank financial institutions has expanded from approximately $300 billion in 2016 to over $1.5 trillion, nearly 11% of all bank loans, per the Semafor report.

The visits follow earlier measures. In April, the Fed requested details from major banks about their exposure to private credit firms, particularly how much these funds had borrowed from banks, seeking to assess strain in the sector and the potential for contagion. Meanwhile, the Treasury Department asked insurers about their private credit investments. At that time, the private credit industry, valued at roughly $1.8 trillion, was encountering increasing redemption requests and troubled loans.

Other watchdogs are also intensifying scrutiny. The Securities and Exchange Commission recently published guidance on valuing private assets, while the European Central Bank and the Bank of England have broadened their own examinations of private credit weaknesses and valuation methods.

The review alone does not indicate losses at the banks under scrutiny, yet it implies supervisors seek stronger proof that collateral valuations and risk controls would remain sound should private credit conditions worsen further.