More banks have tightened lending standards to strengthen their liquidity positions in recent months—sapping borrowers’ appetite for bank loans, according to a Federal Reserve survey released Monday.
Credit is particularly tight at mid-sized banks, which are more concerned than their larger peers about weaker liquidity levels and deposit outflows. This pullback in bank lending has strengthened the hand of private debt firms that have been expanding into segments typically dominated by banks.
The Fed’s survey of senior loan officers, collected April 7, shows that a greater proportion of banks imposed stricter lending standards for corporate and commercial real estate loans in the first quarter, including charging higher premiums on certain loans, reducing the maximum loan amount and requiring more stringent covenants.
In Q1, 46.1% of banks reported tougher loan standards to large and middle-market businesses—those with annual sales above $50 million—and 48.3% said they tightened lending to small businesses.
At the same time, corporate appetite for bank loans fell across the board, with about 65% of respondents reporting weaker demand from large and middle-market companies.
Respondents cited a variety of reasons for keeping credit tight, including increased economic uncertainty, reduced tolerance for risk and depreciated collateral values. They also pointed to concerns over higher funding costs and weaker liquidity positions.
Mid-sized banks felt the pinch of these adverse market conditions more than their larger peers and reported tightening in lending standards with greater frequency.
The survey followed the abrupt failure of two regional lenders—Silicon Valley Bank and Signature Bank—that triggered concerns about the stability of the banking system and led to a steep drop-off in regional bank stocks in March. The collapses led to the recent shutdown of First Republic Bank, which was seized by federal regulators after a more than $100 billion deposit flight and then sold to JP Morgan Chase.
‘A golden moment’
As banks become more cautious with lending, some private debt investors are eager to step in and fill the void.
Blackstone‘s president and COO Jonathan Gray recently told investors in an earnings call that he thinks now is “a golden moment” for private debt solutions.
Gray said he saw a plethora of opportunities to deploy capital in markets such as asset-backed lending due to the retrenchment of regional banks that have normally played a big role in financing cars, home improvement and equipment.
Blackstone is already in talks to partner with a handful of regional banks who have “valuable relationships with borrowers” across the country, and is interested in becoming more active in consumer finance, small and medium-sized business financing and asset-backed areas, Gray told Bloomberg TV in April.
Similarly, Ares Management is seeking attractive investment opportunities created by the pullback in bank lending, according to a Morgan Stanley research note. Ares expects the banking industry will grapple with more stringent capital regulatory requirements and more expensive deposits following the recent crisis, which allows non-bank lenders with a stockpile of capital to take market share, the researchers wrote.
Related read: Squid vs. whale battle in private credit world, as told by $2.75B Emerson/Copeland leveraged loan
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