Private Credit Reporting Requirements Proposed by US Banking Regulators
On December 27, 2023, the US federal banking regulators proposed a new set of reporting requirements for bank loans and commitments to private credit lenders and intermediaries.1 This change reflects not only the rapid growth in this sector, but also the regulators’ desire to better understand and supervise concentrations of credit and risk in the US banking system.
While banks will not be required to report the individual names of direct or underlying private credit obligors, banks and intermediaries should understand how they may be affected by the ways in which regulators and investors use this new information.
Background
Banks are required to file several types of reports with their regulators, including those with respect to the bank’s financial condition, the results of its operations, and risk exposure.2 One of the most common regulatory reports is the quarterly Consolidated Reports of Condition and Income (“call report”), which banking regulators, including the OCC, use to assess a bank’s financial condition.
The information disclosed in regulatory reports—and particularly in call reports—is important because reports often are used by regulators to make supervisory determinations, and usually are made publicly available to investors, depositors, and creditors. The information also is quite detailed, with the FFIEC 031-version of the call report running 89 pages.3
Banks are required to categorize credit exposures into many categories for reporting purposes—including loans secured by real estate, credit cards, and loans to foreign governments—and report the amount outstanding each quarter. Since 2010, banks have been required to report aggregate loans to nondepository financial institutions, which includes loans to direct lenders and other private credit intermediaries.
Proposed Reporting Requirements
The proposal notes that loans to nondepository financial institutions have increased from $56 billion in 2010 to $786 billion in 2023. This constitutes approximately 6.4% of total bank lending. Additionally, the Financial Stability Oversight Council and others have raised concerns over the interconnection between banks and nondepository financial institutions.4
The proposal would require banks with $10 billion or more in total assets to disaggregate the category of loans to nondepository financial institutions into five new categories:
1. Loans to mortgage credit intermediaries;
2. Loans to business credit intermediaries;
3. Loans to private equity funds;5
4. Loans to consumer credit intermediaries; and
5. Other loans to nondepository financial institutions
Additionally, banks with $10 billion or more in total assets would be required to report unused commitments to lend to nondepository financial institutions and disaggregate the information using the same five categories.
The category of loans to business credit intermediaries applies to a broad range of borrowers that predominately lend to businesses, including a substantial portion of the private credit market.6 Reportable loans include loans to direct lenders, private debt funds, commercial paper conduits, finance companies, marketplace lenders, business development companies, and other financial intermediaries. Further, loans to collateralized debt obligations, collateralized loan obligations (“CLO”), and CLO warehouses would be included, as would bank holdings of CLO tranches that are reported as loans for accounting purposes.
Takeaways
On their own, call reports do not create or trigger regulatory requirements. However, regulators use call reports to understand and monitor activities of banks and may intervene if they believe a reported metric is indicative of problematic or unsafe conduct.7 For example, the OCC requires its banks to identify and measure categories of loans that constitute more than 25% of capital and more closely monitor and control such concentrations.8 Banks that fail to appropriately manage concentration risk may receive negative feedback from regulators. This can lead to banks reducing the availability of a product or increasing its price, if the banks are nearing a limit or have been cautioned by regulators.
It is unlikely that the regulators will abandon the proposed reporting requirements in light of the increasing focus on nonbank lending. Therefore, banks should consider if there are targeted changes to the new categorization and related definitions that would ease the reporting burden. Further, private credit participants might consider if the categorization of loans to nondepository financial institutions and the definition of business credit intermediary accurately reflects the segmentation of the market.
Additionally, investors and competitors may use information from call reports to identify market trends and opportunities. This can range from competitors being more likely to target a bank’s customers for a particular product, to investors being less likely to invest in a bank that stops growing in certain categories.
1 88 Fed. Reg. 89,495 (Dec. 27, 2023).
2 12 U.S.C. §§ 161, 324, 1817, 1464.
3 FFIEC, Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices (Dec. 13, 2023).
4 FSOC, Annual Report 2023 at 34 (Dec. 14, 2023) (“The level of opacity in private credit markets can make it challenging for regulators to assess the buildup of risks in the sector.”); FSOC, Statement on Nonbank Financial Intermediation (Feb. 4, 2022); see also Federal Reserve, Statement on Safe and Sound Practices for Counterparty Credit Risk Management (Dec. 10, 2021); but see Federal Reserve, Financial Stability Report (May 2023) (“Risks to financial stability from leverage at private credit funds appear low.”)
5 See our earlier alert on the impact of the proposal on fund finance.
6 FFIEC, Redlined Draft FFIEC 031 Instructions for the Proposed Call Report Revisions with Proposed Effective Date June 30, 2024 (Dec. 27, 2023), https://www.ffiec.gov/pdf/FFIEC_forms/FFIEC031_20231227_i_draft.pdf.
7 Regulators are more likely to intervene if a reported metric indicates that a bank has violated a legally binding limit, such as the limit on loans to one borrower, single-counterparty credit limits, or limitations on interbank liabilities. See 12 C.F.R. pts. 32, 206, 252.
