Banks Increase Lending to Nondepository Financial Institutions

Over the last two years, banks have increased their lending to nondepository financial institutions, many of which are fintech firms, by 23 percent, according to data compiled by FedFis. In comparison, commercial and credit card lending has only increased by 16 percent.

Although there has been some concern regarding overleveraged banks, all the big banks that underwent the Federal Reserve’s annual stress tests in June passed with flying colors. Nonetheless, some experts are still concerned with the amount of money being lent to nondepository financial institutions. 

“It tells you that there’s a lot of demand for these loans and it means that people in the whole lending chain are moving about too quickly,” said Mayra Rodríguez Valladares, a financial regulations consultant. “That exposes you to a lot of operational risk, with more errors made by people in the chain.”

The Office of the Comptroller of the Currency (OCC) shares a similar sentiment, saying that “most of the credit risk associated with leveraged loans is outside the federal banking system with much less transparency, making it more difficult to monitor … Accordingly, the OCC has been discussing with bank boards and management the potential effect on the financial system from originating and distributing weakly underwritten loans to leveraged borrowers.”

Banks themselves have downplayed these concerns. Wells Fargo claims that the credit quality of its loans to nondepository financial institution is better than its overall commercial loan portfolio. “We like the underlying collateral [on these loans], with a focus on assets we understand well,” said Wells Fargo’s Chief Financial Officer John Shrewsberry.