Private credit disclosures leave more questions than answers

Muddled metrics and scattergun reporting hinder comparison of US lenders

Key points Summary Q&A

• Regulators and investors lack standard data on US bank exposures to private credit.
• Data reported on official FR Y-9C forms is hard to compare with banks’ own disclosures because of divergences in metrics. 
• PNC reported $33bn of loans to business credit intermediaries but only $7bn of private credit, while KeyCorp showed $10.9bn of private credit versus $9.7bn of BCIs.

These summaries are generated by an LLM, but edited by humans.

The first step in solving a problem is understanding the problem. That’s proving tricky in the case of private credit.

The lack of standardised, detailed disclosures means regulators and investors have little way of gauging the size and make-up of bank exposures to private credit firms.

In the US, large banks must file quarterly reports to the Federal Reserve giving a detailed breakdown of exposures, both on- and off-balance sheet. The latest version of this FR Y-9C form has more than a thousand individual data and text fields, and yet none relate specifically to private credit.

The closest category is loans to business credit intermediaries (BCIs), which covers a range of companies including private credit, but also private debt funds and collateralised loan obligations.

Another category is “other loans to nondepository financial institutions”, which is a catch-all to bundle up exposures that don’t fall into one of the four other NDFI categories.

Just how much variation exists in these metrics has become clearer as banks have published their earnings for the first quarter, with many pointing out the differences between loans to BCIs and disclosed private credit. PNC Bank, for example, revealed that of its $33 billion of these loans in Q1, only $7 billion were loans to private credit providers.

It is not a simple case of the BCI loans being completely unrepresentative, however – take Citizens Financial Group, which reported $5.4 billion BCIs in its FR Y-9C report compared to $4.1 billion of private credit loans in its earnings. Some banks had more private credit loans than BCIs, such as KeyCorp ($10.9 billion of private credit loans versus BCIs of $9.7 billion) and First Citizens Bank ($2.9 billion versus $2.2 billion).

 

To add further confusion, when banks take the opportunity to provide further clarity they focus on different metrics. Several banks, for example, chose to disclose their loans to business development companies (BDCs) – a type of closed-end investment company that generally lends to middle-market businesses. These are a type of private credit exposure, but not the only one.

State Street compared its $31.4 billion of NDFI lending (of which $21.2 billion was to BCIs) to just $1.6 billion of loans to BDCs, while Truist described its $4 billion exposure to BDCs and middle market loan securitisations as representing its exposure to private credit, as opposed to its $21 billion total loans to BCIs.

However, US Bancorp’s disclosures show that comparing one bank’s BDC loans to another’s private credit loans could be likening apples to oranges. The bank labelled $9.6 billion of BCIs as private credit, of which just $1 billion were BDCs.

The confusion is best shown in the case of Wells Fargo, which had the largest absolute amount of loans to BCIs as of Q1. In its earnings, the bank disclosed “corporate debt finance” of $36.2 billion, of which about $8 billion was BDCs – again demonstrating the gap between the metrics. In the bank’s earnings call with analysts on April 14, it took two questions to establish that the $36.2 billion figure of corporate debt finance was private credit – generally a narrower category than corporate debt – and that BDCs were a subsection of that private credit. The $36.2 billion figure was also not the entirety of the bank’s private credit exposure, though it was described as “the vast majority” by chief financial officer Michael Santomassimo.

JP Morgan meanwhile did not disclose its private credit holdings in its earnings, but did in response to a question in a call with analysts, where chief financial officer Jeremy Barnum sized exposure at “about $50 billion”. BCI loans for the same period were $54.1 billion.

When even bank industry groups are complaining that the reporting regime is not transparent enough, there is a clear need for a change

The upshot of all this is that any attempt to compare banks against one another or a given benchmark will be laden with caveats. Based on the examples above, the standardised metrics disclosed by all banks could range between dramatically overstating to slightly undershooting actual exposure, while turning to banks’ own disclosures throws any semblance of standardisation out of the window. 

That’s before even acknowledging that not all banks with substantial exposures to business credit intermediaries published a breakdown of private credit exposure in Q1 – Goldman Sachs for example did not mention the issue in its earnings – and it is highly unlikely that all of those that did will continue to do so regularly.

Standardised, frequent, compulsory disclosures based on metrics picked by regulators rather than banks are more than just a nice thing to have. The absence of compulsory disclosure of economic value of equity (EVE) in the US allowed Silicon Valley Bank to sweep its growing interest rate risk under the rug in the lead-up to its collapse in the spring 2023 banking crisis. Had disclosures been mandatory, there would have been greater opportunity for earlier regulatory intervention. 

Yet even after a crisis that took down several banks, no action was taken on implementing mandatory Basel-style disclosures for EVE – and over three years later, advances in voluntary reporting have ground to a halt.

What would better disclosures look like for private credit? The FR Y-9C and call reports are the most obvious places to include a standardised disclosure, either reworking the breakdown of loans to NDFIs or adding a supplemental metric. The Federal Reserve is even currently considering a proposal to streamline the call report, which received comment from the Bank Policy Institute including concerns about ambiguity over the classification of NDFI loans. When even bank industry groups are complaining that the reporting regime is not transparent enough, there is a clear need for a change.

Whether that change will materialise is a different question. The current regulatory bent is towards fewer disclosures, not more – after all, the Federal Reserve proposal was pitched as “streamlining”, while elsewhere the SEC is consulting on measures permitting public companies to file reports every six months rather than the current three months.

If the EVE example is anything to go by, those waiting on better disclosures for private credit shouldn’t hold their breath.

Editing by Alex Krohn