Cyclical and secular forces have combined to create widespread challenges for the traditional banking sector. We look at the evolving lending landscape and what it means for markets and investors as private alternatives fill the void as banks retreat.
The extension of credit in the U.S. economy has undergone a slow-motion transformation through the decades as banks have slowly conceded market share to other players. These long-term trends have come into greater contrast over the last two years as banks have been faced with an inverted yield curve, liquidity issues, and the prospect of additional regulation. As we will show in this chartbook, the impressive growth in the private debt landscape can be directly traced to the role of banks, which in many cases has shifted from principal lending to more regulator-friendly activities such as syndicating risk and holding Treasury/Agency bonds. This shift is clearest in the world of business credit, where banks once comprised more than 35% of lending.
Today, that share has drifted closer to 20% – first as traded bond and loan markets grew, and more recently thanks to the rise of private corporate credit. Banks used to control origination and holdings of residential mortgages, but that business has been hollowed out, as well. Today, nonbanks dominate mortgage origination while government agencies and agency-backed pools hold most U.S. single-family mortgages. Commercial real estate lending is one business line where banks have held onto market share, though we see clear signs the winds may be shifting there, as well. While the drivers may vary, the outcomes are the same: lending is shifting away from banks, in many cases to private lenders, a trend we believe will accelerate and offer new opportunities for investors to capture the income generated by the U.S. economy.
