Some are choosing to cooperate with private credit firms, acting as facilitators between their corporate clients and these new lenders. This approach allows banks to maintain client relationships while potentially reducing their credit risk exposure.
Other banks, particularly large institutions, are opting to compete directly by building their own private credit capabilities. These banks can leverage their balance sheets, wealth management divisions, and investment banking groups to raise funds and source deals.
Interestingly, the report reveals a significant disparity in how banks of different sizes are approaching this challenge. US globally systemic important banks (GSIBs) are pursuing multiple strategies, with some experiencing greater success than others in fundraising for bank-owned private credit funds.
Regional banks, on the other hand, appear to be more vulnerable to the rise of private credit. A study by The Brookings Institution cited in the report found that “the lending model of the larger regional banks appears to be most exposed to competition from nonbanks”.
Surprisingly, seven of the regional banks researched by Deloitte have yet to announce any strategic initiatives to compete or cooperate in this space.
Foreign banks are leveraging their wealth management teams to build capabilities, offering global wealth clients access to US-based private credit exposure. This approach could help them grow their presence in the US market.
The report also highlights the potential impact of regulatory changes, particularly the expected Basel III endgame rules. Bank CEOs have expressed concerns about the constraints these rules could place on their ability to lend, potentially driving more business to less regulated entities like private credit firms.
As the lending landscape continues to evolve, banks face the challenge of balancing strategic moves into private credit with regulatory and economic challenges.
The report suggests that it could take several years for most banks to fully adapt to these new conditions and effectively deploy strategic initiatives that incorporate private credit.
“Banks should consider identifying their ability to compete or cooperate and create holistic strategies for this new era in credit,” the report advises.
“Failure to develop a strategy could put banks at risk of losing interest and fee income, as well as missing opportunities to arrange and divide deals to better serve clients.”