Bloomberg News published an editorial Dec. 5—"by the Editorial Board”—warning that bank credit and so-called “private credit” (offered by insurance companies, pension investment funds, private equity funds, etc.) have become “intertwined by veins of leverage” and that a bank crisis is threatened by the process. “Private credit” has recently suffered some major debt liquidations like the First Brands case. The editorial, “Private Credit Woes Should Put Banks on Notice,” stated at the outset that one in ten private credit borrowers are paying the interest on their loans with new debt; 45 borrowing companies have been taken over by their lenders this year; and “Pools of private credit loans managed by BlackRock Inc. and Blue Owl Capital Inc. are showing signs of distress.” As for the megabanks, while total assets of so-called private credit lending are estimated at $1.3 trillion, big banks’ lending exposure to private credit pools is estimated to be $585 billion, about 45% of the total private credit pool! Every party in the private credit market borrows from banks—the investors, the borrowers, the loan pools—and often use their borrowings as collateral for more borrowings from each other. Private credit lending is not regulated.
“Batten down the hatches,” say the Bloomberg editors. A Glass-Steagall Act would be more direct to these banks: “Out of the pool!” The Trump Administration, by contrast, is blowing the hatches off.
The same Bloomberg News on the same day published “U.S. Regulators Ease Post-Crisis Curbs on Leveraged Lending.” The report opened blandly, that “U.S. banking agencies are easing Obama-era rules that spurred complaints from bankers [that] they were being sidelined by too much regulation, amid rapid growth in the private credit industry. The 2013 guidance was ‘overly restrictive’ and ‘overly broad,’ the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. said in a statement on Friday [Dec. 5]. The old guidance resulted in a significant drop in market share for regulated banks in leveraged lending, and pushed much of that business to nonbanks, the regulators said.”
But what about the regulation? The Office of the Comptroller of the Currency (OCC) and FDIC were confident: “The agencies expect banks to manage leveraged lending exposures consistent with general principles for safe and sound lending.”
