What to Make of the Brave New World of Non-Bank Lending?

Against the backdrop of press surrounding the proposed, debated restructuring of the banking industry, and especially the considerations around what businesses banks could and should be undertaking or could profitably undertake (reflecting two views there: regulator and shareholder), we thought it made sense to discuss the emerging role of the non-bank lenders in the marketplace for credit. This evolution is ongoing, of course, right before our collective eyes, and its nascent state is a result of the current credit and regulatory environment.

Consider for a moment:

  • On the bank side there are constraints driven by regulation
  • Firms working on efforts related to compliance with the Volcker Rule, the leveraged lending guidelines, and the raft of other regulations out of Basel, local regulators globally and Congress
  • These affect not just credit risk evaluation, but link risk to liquidity and funding requirements, which creates a whole new set of ratios and stress testing for the regulated financial institutions

The picture is made more complex as different sets of regulators have differing views, interpretations and applications of these regulations, sometimes by geography or sometimes simply by interpretation.

This presents a massive opportunity for non-bank, unregulated lenders and they are moving quickly to jump into this mix:

  • Banking firms have made alliances with funds or insurance companies as a way to address client lending needs (EG SocGen/AXA, Lloyd’s with its own co)
  • Non-bank investors outside the scope of banking are stepping into the market in a sizable way to meet the needs of clients for credit (Jefferies aligning with Mass Mutual/ leading: their balance sheet is the affiliation)
  • A number of new direct lenders (Hayfin) are organizing to invest directly with clients
  • Retail sector: peer-to-peer consumer lending: EG Apple Pay, Google Pay, the spinout of PayPal from EBay; Lending Club (recently went public) and Prosper Marketplace

Perhaps the current state is well summed up in this quote from the JPMorgan 2014 shareholder letter:

Jamie Dimon: “Non-bank financial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will”

Implications for our clients:

  • Growth across the board, larger leveraged transactions, alliances with insurance cos, and new electronic platforms in the retail sector
  • Financing proposals may have a more “apples to oranges” flavor, and the economics may be significantly different among providers
  • Historic relationships should still prosper, but the door opens for surprises as banks digest and change behavior driven by the new rules

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