US Banks Unconcerned About Potential Private Credit Crisis: What Are the Risks?
US Banks Unconcerned About Potential Private Credit Crisis: What Are the Risks?
Jakarta, CNBC Indonesia - The largest banks in the United States (US) recorded a combined total exposure of more than $185 billion to private credit last week, an asset class that has been under pressure in recent months.
Banking executives, seeking to allay investor concerns, affirmed that they still see potential in the market.
Potential Growth and Business Relationships
Citizens Financial Group Inc.’s private credit portfolio is estimated to rise by around 5% in 2026, in line with previous years’ trends.
According to Chief Executive Officer Bruce Van Saun, this area is considered important for several of the company’s major business relationships. He noted that the bank’s primary goal is to strengthen those partnerships and open opportunities for other businesses.
For years, the prevailing view has been that private credit could swell to an asset class worth $1.8 trillion due to post-financial crisis regulations limiting banks from lending to risky borrowers.
However, this week’s earnings reports revealed the actual financial strength of private credit firms that rely on banking.
Concerns Over Spillovers and Risk Management
Although each lender measures it slightly differently, the total exposure points to more than $185 billion, with nearly 20% coming from regional banks.
Amid investor and regulator vigilance regarding the possibility of weakness in the private credit market spilling over to the traditional financial system, executives spent much of last week calming those fears.
U.S. Bancorp’s Chief Financial Officer, John Stern, stated that it is hard to imagine losses on this portfolio’s books. U.S. Bancorp is one of the lenders that updated details on their exposure, totalling around $9.6 billion, including collateralized loan obligations (CLO).
The bank emphasised that they are always prepared for the worst-case scenario by ensuring concentration limits on lending. Therefore, the scenario that could trigger losses on their private credit portfolio would have to be extremely severe.
Overall, banking executives assess that the bar for pressure in private credit to cause losses to banks remains very high.
Banks are typically at the top of the capital structure, meaning potential losses in the market would have to wipe out equity and junior debt first before impacting the banks.
Focus on Macroeconomics and Market Opportunities
Rather than worrying about private credit, PNC Financial Services Group Inc.’s Chief Executive Officer, Bill Demchak, argued that real concerns should be directed at speculative-rated credits more broadly.
In his view, weaker credit structures could pose risks if economic conditions deteriorate beyond expectations, as default rates begin to creep up in that segment.
If the economy continues to weaken, credit losses are believed to be greater than many currently assume.
On the other hand, banks also see opportunities to step in as some private credit firms begin to withdraw. Several non-bank lenders are currently facing redemption issues, particularly in retail mutual funds, leading them to reduce lending.
This situation opens space for deposit-taking institutions to re-enter. Echoing this sentiment, M&T Bank Corp.’s Chief Financial Officer, Daryl Bible, noted that his company has successfully capitalised on these opportunities, as many borrowers now prefer to deal with banks perceived to have proven operational stability.