No. of Recommendations: 33
I can't speak to the credit risk aspect of bank lending vs P/E lending - but banks (at least Federally-chartered banks) have two big competitive advantages over P/E firms and other non-bank lenders. I think these advantages are significant and durable.
1) Banks create deposits when they extend a loan. This power comes from their Federal charter. People sometimes believe that this process operates in reverse (ie, banks must "gather" deposits first, then lend). The way I think about it is that a bank monetizes your IOU by creating a deposit which you can then spend. Of course, your deposit may move to another bank but in aggregate across the US entire banking sector a loan creates a loan asset and a deposit liability for the banking sector. And of course, for the non-bank private sector this is matched with a deposit asset and a loan liability. In addition, these deposits below a certain level (and sometimes above, I'm looking at you, SVB!) are guaranteed by the FDIC. Of course, banks pay a fee for that insurance but its still a huge advantage.
Other non-bank lenders can't create deposits out of thin air when they lend. They must first gather them or borrow and add capital in order to lend. Capital raising is expensive and banks have a competitive advantage here, IMHO.
2) Banks (again I'm talking Federally-chartered banks) have "checking" accounts at the Federal Reserve that gives them a "monopoly" on payment clearing (via Fedwire). If a P/E firm lends to you, they still have to deposit the funds in a bank before you can spend them. Here too, this is a competitive advantage for the banks. In fact, all forms of Federal government spending first move through the banking system (i.e., the US Treasury issues an order to the Federal Reserve to move settlement balances from its General Account to, say, JPMorgan's settlement account at the Fed. This settlement transfer immediately "lights up" electronically a corresponding deposit liability for JPM and a deposit asset for the holder of that deposit account at JPM. P/E firms don't get this flow of funds because they don't have accounts at the Fed.
Perhaps this all changes in the future and more institutions get accounts at the Fed. But for now, I think these are two huge advantages for the US banking sector over all other non-bank lenders. P/E firms could try to own a bank but that comes with a host of regulations and disclosures that they may not have the appetite to take on.
FWIW. Apologies if this old hat for everyone here.
Bill
