The FDIC issued a multi-part analysis of the shift in corporate and mortgage loans from banks to nonbanks since the 1950s.
The studies address: (i) shifts from bank to nonbank lending, (ii) the increased reliance on capital markets for leveraged lending and corporate borrowing, and (iii) bank and nonbank home mortgage origination and servicing.
According to the FDIC, the banking industry "changed dramatically" over the past 70 years. The FDIC asserted that the shift from bank to nonbank loan origination was primarily caused by securitization. As a result of this shift, the FDIC warned that:
underwriting standards may change when there is an increased loan demand due to the increasing role of "less-regulated" financial institutions (i.e., nonbanks) in lending; and
while the market is more liquid for private securities, it could "dry up quickly" in a financial crisis.
The FDIC found that corporations, especially nonfinancial corporations, have significantly increased their debt since the end of the financial crisis. Most of the growth in corporate debt originated from capital market financing (rather than bank financing) in the form of corporate bonds and syndicated leveraged loans. The FDIC identified several risks associated with this long-term trend, stating that:
corporate debt has become riskier due to the substantial increase in lower-rated bonds and the reduction of lender protections in leveraged loan markets; and
banks still face direct and indirect exposure to corporate debt risks due to bank holdings of leveraged loans, bank financing of nonbank financial firms, and "pipeline risk" in bond and leveraged loan issuance.
The FDIC reported that nonbank mortgage originators and servicers hold significant market share since the last financial crisis, but may retain pre-crisis vulnerabilities. According to the FDIC, the post-crisis and pre-crisis funding structure of these entities appears similar enough to raise concerns regarding the outcome of another instance of housing-market stress. The FDIC specified that nonbank risks include:
liquidity and funding risks of the nonbank structure;
interest rate risk from refinancing-focused lending;
potentially reduced availability of FHA-insured and other government loans in the event of widespread nonbank failures;
"incremental easing in historically tight credit standards" due to increased competition;
cybersecurity risks due to increased reliance on technology; and
risks resulting from less robust regulatory oversight of nonbanks compared to banks.
The FDIC outlined key credit and market risks that could affect FDIC-insured institutions, the FDIC's deposit insurance fund and community banks.