About this episode
Banks are essential to the healthy functioning of the global economy, and their role in the financial system has been anything but static over time. Today, headwinds for banks and the growth of private markets point to further evolution.
Join Chief U.S. Economist Lara Rhame and Executive Director of Research Andrew Korz as they dive into their recent Playbook for the great lending evolution to explore the interplay between banks and private credit today.
Transcript excerpt
[00:00:05] Lara Rhame: Welcome back to FireSide, a podcast from FS Investments. I’m Lara Rhame, Chief U.S. Economist, and I’m joined today by my partner on the research team, Andrew Korz. Andrew, welcome.
[00:00:15] Andrew Korz: Thanks, Lara. Excited to be here.
[00:00:16] Lara Rhame: Today’s conversation is going to focus on the banking sector, the rise of private lending and what’s next for banks.
We’ve written a great piece called “Playbook for the Great Lending Evolution.” Advertisement in advance: Look at the show notes and download it. It’s really a terrific narrative and discussion of this critical topic. But I love the title because, you know, the difference between the words evolution and revolution is so powerful.
A lot of money and a lot of interest and attention has surged into private lending and private credit. But it’s not a revolution, right. It’s been a multi-decade evolution. And to us, this fundamentally changes the way financial markets, the economy, investors and interest rates all interact.
[00:01:07] Andrew Korz: Yeah, Lara, our reason for writing this chartbook and for this podcast is really to track that evolution over time, because to your point, it really has been a slow burn, right. You look at what the banking sector looked like 60 years ago versus today. It’s completely different, but it’s been a slow pace of change, over time.
So I’ll throw it to you first. Can you give us an understanding of the core drivers of this change over time—regulation, consolidation of the banking market, innovation and other parts of the market? What are, in your view, the core economic drivers of what’s gone on in the banking sector?
[00:01:41] Lara Rhame: I feel like the banking sector really piqued in importance for our economy in the mid-seventies, early seventies. And just through multiple phases of added regulation. We all really think of the financial crisis and Dodd-Frank regulation that came in and have seen business debt fall from 40% in the early 70s, only 20% today.
When you think about the bank share of household lending or to household debt, it has really plunged. It was over 70% in the mid-70s to now only 20% of mortgages. Even you look at consumer debt—which is your autos, your credit cards—it has gone from 60% down to 40%. A lot of numbers there, but it’s been a long, slow decline.
And we’ve had regulation that has radically increased transparency, limited the sphere of banking investment opportunities, raised their capital requirements. And that has also pushed this massive consolidation from over 14,000 banks. Today we have just 4,000 banks. And I think maybe the last observation I’ll make is this winner take all—now landscape within the banking sector.
