April 22, 2024 - The Federal Reserve published the spring edition of its semi-annual Financial Stability Report last week. The Fed notes that bank lending to nonbank financial institutions (NBFIs) increased quarter-over-quarter in the fourth quarter of 2023 after remaining flat in the third quarter. Though the increase was driven by open-end funds, special purpose entities and securitization vehicles, bank credit commitments to private equity fund, business development companies and credit funds also rose. The report indicates that utilization rates on credit lines to NBFIs decreased from the third quarter to 50% on average and that delinquencies on bank leverage continued to decline.

These trends are in line with those reported in the Financial Stability Report issued in October 2023 and support the ongoing availability of credit to NBFIs as they demonstrate that credit growth does not necessarily translate to an increase in credit risk. Moreover, the Fed’s point in the October 2023 report about data on NBFIs’ alternative funding sources being limited and potentially masking vulnerabilities in the financial sector is absent in the April report.  Similarly – and notably, given the increased scrutiny of late from global financial regulators and agencies –  the April report does not reference the risks from private credit, which were highlighted in the May 2023 Financial Stability Report. Despite calling attention to the asset class’s lack of observable data, the Fed concluded at that time that financial stability vulnerabilities posed by private credit funds are limited.