Non-Bank Lending Booms, But Are Risks Underestimated?

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Nick Chamie, Chief Strategist and Senior Managing Director of Total Portfolio & Capital Markets, and Jennifer Hartviksen, Managing Director and Head of Global Credit at the Investment Management Corporation of Ontario (IMCO), provide insights on the evolving credit market landscape.

Just over a year ago, the collapse of Silicon Valley Bank (SVB) marked the largest U.S. banking failure since the 2008-09 financial crisis. This event seemingly hastened the involvement of institutional players in the credit market, filling the gap left by traditional U.S. banks.

However, SVB’s failure was merely part of a broader trend of commercial banks retreating from lending, a void increasingly filled by private credit providers since the 2008 crisis. Post-crisis regulations and increased capital requirements for major banks have limited their credit extension capabilities. According to the International Monetary Fund, bank credit as a share of U.S. GDP has stagnated since peaking at nearly 60% in 2007.

Institutional investors—asset managers, insurance companies, pension funds, and sovereign wealth funds—are seizing this opportunity. With stable long-term funding sources, these investors have nearly tripled the size of the private credit market, projected to reach $2.8 trillion by 2028, according to Preqin. Despite some banks attempting to reclaim this business and concerns about private credit’s risk profile and regulatory oversight, private credit is proving resilient and beneficial.

Banks operate with high leverage, relying on deposits that can be withdrawn at any time, which poses systemic risks. In contrast, institutional investors provide stable, long-term funding that aligns with borrowers’ needs. These sophisticated investors, with their scale and long investment horizons, can navigate the credit cycle effectively. Their expert underwriting, risk management, and rigorous oversight allow them to lend across various credit segments while mitigating risks.

Borrowers benefit from access to well-capitalized investors offering bespoke financing solutions not available in traditional markets. Private lending reduces systemic risk. Data from the Canadian Association of Insolvency and Restructuring Professionals shows that Canada had the largest increase in business insolvency filings in 2023, the highest in 36 years. In such scenarios, private credit acts as a lifeline for borrowers, preventing bankruptcies by providing necessary financing when public markets are closed.

After a decade of near-zero or negative interest rates, a return to a more normalized rate environment enhances the appeal of credit as an asset class. Persistently higher and more volatile inflation and interest rates are expected to further constrain traditional banks’ lending capacities. This environment favors institutional investors, who can capitalize on market dislocations and the increased demand for alternative financing solutions.

This shift reflects a well-functioning market where capital providers are more closely connected to end borrowers, creating new investment opportunities for both parties.