Banks' “Considerable” Exposure to Private Credit | Chris Whalen on Banks’ Loans to NBFIs, Plus CRE, Gold, and Payments
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Today's episode is brought to you by the unlimited HFGM global macro ETF, ticker HFGM. Later in the show, you'll hear more about HFGM, currently the number one Morningstar rated fund since its inception in The US macro trading category. Let's get into it. I am joined by banking specialist Chris Whelan. Chris, good to see you.
Nice to see you, Jack.
Chris, we're right in the middle of bank earning seasons. What have you made of everything? I wanted to ask about credit, wanna ask about net interest margins, but specifically, a topic that a lot of people are talking about that's very important is bank exposure to private credit and broadly to the nonbank financial institutions or nondepository financial institutions. What are your thoughts?
The banks generally have pretty senior positions when it comes to private credit. It's really the investors in these strategies that are first in line in terms of taking losses. So I think what you're gonna see is that some banks that have not been as astute as others, you know, we saw some good disclosure from Citi this quarter where they broke out basically $22,000,000,000 worth of exposure to NDFIs, non depository financial institutions. But really, their exposure to mortgage lenders is bigger. So I think the large banks are managing this exposure pretty astutely. They tend to sell their ex
Ex explain what positions banks are making with regards to private credit. So the old school way, a lot of these banks would just make these loans themselves. Now that credit risk has migrated out of the banking system that which has pleased the regulators greatly. It is made by these private credit giants, but the banks are now lending to those private credit giants. Is that right?
Yes. They will make direct loans to the sponsors, as they're called. The sponsors in turn will make loans to their portfolio companies, and all of this is done on a nonrecourse basis. So somebody lends to Apollo or Ares or Brookfield, the bank really doesn't have recourse against the asset. That's a big question mark in my mind because all the banks keep telling us that these exposures are investment grade. You see this in the Citi presentation. We'll see. We have no independent way of verifying that. These entities are not rated. They're clearly not public. Right? So we don't know. What's hap
Well, I wanna ask who the smart players are, who the perhaps less smart players are. But first, give us a scale of the numbers. Just how large are these loans to nondepository financial institutions? And then how does that compare to what JPMorgan Citi have actually reported as opposed which is this is our private credit exposure, which they say is a much smaller pie. And then you can compare that to the overall, you know, lending ecosystem and bank equity.
Well, non depository financial institutions is a big category. It includes mortgage lenders. It includes anything that's not a bank. So there's a subset of that. And if you look at the totality for the big banks, it's like a 150,000,000,000. The total loans to NDFIs is about 1,000,000,000,004. And then there's unused credit lines out there, which are two x that. So the total exposure, if you think of it in Basel terms, is almost $4,000,000,000,000. And, again, not all of this is private credit. There's a lot of it that is mortgage. You know, Citi, for example, has several times more mortgage e
From your work, WGA, nominal nondeposited financial institution loans from banks is 1,400,000,000,000. And if you count unused commitments, it is far higher, just south of $3,000,000,000,000 But you're saying
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