Loan commitments from large banks to private equity and private credit funds have seen a significant increase, according to a recent note from the Federal Reserve Bank of Boston. The report estimates that these commitments have grown from approximately $10 billion in 2013 to about $300 billion in 2023.

The note's authors emphasize the importance of understanding the lending relationships between banks and non-bank financial institutions (NBFIs), which include private equity and private credit funds. John Levin, a senior markets specialist at the Boston Fed, noted that these relationships can be "opaque" due to limited public disclosures in these industries.

"We use regulatory data from large banks to examine these lending relationships," Levin stated. "We found through our analysis that they are growing and warrant continued monitoring."

Levin co-authored the Supervisory Research and Analysis note with Antoine Malfroy-Camine, a senior risk analyst at the Boston Fed. Their research indicates that while there is a narrative suggesting banks are losing borrowers to NBFIs, these funds are also borrowing significantly from large banks.

To estimate bank lending extent, data from 31 large banks subject to the Federal Reserve’s 2024 stress tests were analyzed. This included details of over 50,000 fund-level loan commitments made to private funds.

The study found that fund-level loans accounted for about 14%, or $300 billion, of large banks' total loan commitments to NBFIs in 2023. Lending to NBFIs represented around 10% of total lending by large banks during this period.

Further research was conducted by the authors to trace borrowers back to larger management companies or sponsors. They discovered that five companies received about one-third ($100 billion) of all loan commitments made by large banks to private funds.

Despite this concentration, Levin explained that each loan has its own repayment terms and collateral, reducing potential default risks for banks providing lines of credit.

"Our study illustrates the increasing connections between banks and non-banks," Malfroy-Camine said. Additional information on these connections is available in the Federal Reserve’s recent Financial Stability Report.

For more insights into this topic, read the full note on bostonfed.org.

Contact our media relations team for further inquiries or interviews with Boston Fed economists and researchers.

Amanda Blanco

Amanda Blanco is part of the communications team at the Federal Reserve Bank of Boston.

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