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Federal Reserve Data Shows Nontraditional Lenders Gaining Ground on Banks in Business Lending

  • Analysis of Federal Reserve report shows banks losing ground in commercial and industrial lending to alternative lenders
  • Bank and nonbank share of commercial debt expected to be roughly equal in fourth quarter of 2021
  • Banks could form partnerships or expand offerings to remain competitive

Summary by Dirk Langeveld

Alternative lenders are approaching parity with banks in commercial and industrial lending, according to analysis of the Federal Reserve’s “Flow of Funds” report.

The analysis by Autonomous Research projects that banks’ share of the commercial debt market will drop from 24 percent in 2020 to 23 percent in the fourth quarter of 2021. At the same time, nonbanks’ share is expected to grow from 20 percent to 22 percent. Corporate bonds account for the remainder of commercial debt.

  • Alternative lenders previously sought to compete with banks in residential mortgages, but have since started to compete more in business lending due to lower collateral requirements, a quicker turnaround, and other accommodations to borrowers
  • Some banks have also grown more reticent about business lending, especially to small businesses, and are opting to pursue other options with higher potential returns
  • The analysis notes the curious trend of the rapid growth of banks lending to nonbank lenders
  • Some observers suggest that in order for banks to stay competitive against alternative lenders, they will need to form partnerships with them or update strategies to better engage business customers

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