Bank executives last week largely brushed off the competitive risk posed by private credit, but Regions Bank CEO John Turner suggested it’s a looming threat.

“We’re seeing them more as a competitor, to be sure,” Turner said of private credit providers during a Wednesday appearance at a Morgan Stanley conference.

Turner noted private credit’s presence in some recent deals and mentioned the Birmingham, Alabama-based bank even lost “a potential opportunity” to direct lenders recently. 

Thus far, private credit providers such as private equity firms and asset managers are primarily lending to private equity-owned companies, Turner said. “Typically, they’re providing a couple turns more leverage than we would be willing to provide, they’re providing longer terms, they’re providing more loan proceeds,” he said.

Private credit is projected to balloon into a $3.5 trillion market by 2028, according to BlackRock. For the most part, the private debt market isn’t yet infringing on areas in which Regions is active, Turner said. “But it’s coming, I suspect,” he added.

Earlier in the week, Wells Fargo CFO Mike Santomassimo said private credit providers, thus far, are mostly extending loans the bank wouldn’t opt to, so it hasn’t cut into the San Francisco-based lender’s core business.

Still, “there’s obviously a role to play, in certain circumstances, for credit that we might not be comfortable with putting on our balance sheet,” he said Tuesday at the conference. 

That’s partly why Wells partnered with Centerbridge Partners last September to launch a $5 billion private credit fund meant to offer direct lending to middle-market companies. One of the goals of that relationship was to enable the bank to stay relevant with clients, Santomassimo said. 

JPMorgan’s view

Although JPMorgan Chase CEO Jamie Dimon last month warned of coming problems in the private credit sector, saying “there could be hell to pay” as retail clients get access to less liquid products, Troy Rohrbaugh, co-CEO of the bank’s commercial and investment bank division, struck a calmer tone during his appearance at the conference. 

The private credit discussion is being deemed “adversarial,” pitting the largest direct lenders — such as Blackstone, Apollo and KKR — against banks, but Rohrbaugh said he sees it differently for JPMorgan.

“I just don’t view it as adversarial,” he said Wednesday at the conference. “The market is big enough that both sides can succeed. And our strategy is about partnering with both sides.”

The New York City-based bank’s core client base is its borrowing clients, but lenders are also large clients of JPMorgan’s, Rohrbaugh noted. 

“While we may compete on a given deal here or there, or several deals, we’re going to be a place where they can come to source assets, and I think that is ultimately the winning solution,” he said.

While the growth of private credit suggests the shrinking of banks’ lending business, banks and nonbanks are closely linked, with nonbanks “especially dependent on banks both for term loans and lines of credit,” according to a Monday post from the Federal Reserve Bank of New York’s Liberty Street Economics blog.

JPMorgan spends a lot of time considering its strategy in the segment and plans to continue competing there, Rohrbaugh said.

“When you hear other people talking about growing their financing business, often, this is what they’re talking about,” he said. 

The bank has previously said it would put $10 billion in capital on its balance sheet in direct loan format to corporate borrowers, and JPMorgan has put a “significant” amount of that to use already, Rohrbaugh said. 

“There’s nothing stopping us from doing more,” he said. Ultimately, “it almost doesn’t matter whether we do 10-20 [billion dollars] or 20-30 [billion dollars]. It’s a $1.7 trillion market and growing. Whether we do 10-20-50 — it doesn’t matter, it’s very small. That’s not going to be the place that we make the biggest impact. The reason we’re doing that is to be in the ecosystem of the lenders.”

Rising competition?

Direct lenders aren’t held to the same capital requirements as banks, and to the extent Basel III raises those requirements for lenders, “that’s going to be another factor that could potentially push some of that business out into the nonbank space,” said Carl Goss, a Dallas-based partner at law firm Hunton Andrews Kurth.

“The fear here is that there’s going to be private lenders out there that aren’t beholden to regulators or licensing regimes, and they’re just able to move faster to meet a particular loan demand from somebody,” Goss said. 

The movement of lending opportunities to private credit providers could become problematic, because “if you have a lot of deposits, but you can't make loans, you can't make money,” Goss noted.

If more banks start losing deals to private lenders, banks may seek to change their operations to compete, Goss said. Or, if they can’t compete because these loans have been deemed too risky from regulators’ point of view, “they might start pushing back against their regulators on credit restrictions,” he said.

Regulatory action late last year may bring change for private credit providers: The Financial Stability Oversight Council finalized a rule in November that would allow regulators to increase oversight of nonbanks such as asset managers and hedge funds, and label them as systemically important financial institutions.