TORONTO, April 14 (Reuters) - Canada's federal banking regulator said on Tuesday it was conducting reviews on the big banks' exposure to private credit, or loans to non-bank groups, as negative headlines have drawn scrutiny to the rapidly expanding asset class.
The high-profile bankruptcies of U.S. auto parts supplier First Brands and car dealership Tricolor turned the spotlight on Wall Street banks' exposure to non-depository financial institutions such as private equity and private credit managers.
Here is what the Office of the Superintendent of Financial Institutions said in its annual risk outlook:
* Canadian banks' exposures to private capital firms andtheir portfolio companies have grown considerably in recentyears, representing a material component of the balance sheet,OSFI said. * Banks are increasing the use of NBFIs, or non-bankfinancial institutions, to provide credit protection on theirlending portfolios using synthetic risk transfers and otherarrangements. Reductions in credit protection could reducebanks' ability to lend to clients, increase credit risk, andnegatively impact capital levels, the regulator said. * "The opaque nature of this market can mask structuralweaknesses, and the highly leveraged nature of these privatecapital firms can intensify losses in a stress event," theregulator said. * It is now conducting reviews on exposure to NBFIs, riskrating approaches, and governance processes. * According to RBC Capital Market analysts, Bank of Montrealand CIBC have some of the largest exposure to financial loans atabout 11% and 10% of total gross loans, respectively, as oftheir first quarter. Scotiabankand National Bank have thesmallest among the big banks. * Royal Bank of Canada last quarter said NBFI and financingproducts comprised 8% of its total loans. * Meanwhile on Wall Street, bank executives said they werestress-testing or monitoring private credit portfolios, but saidthey were comfortable with their exposure.(Reporting by Nivedita Balu in TorontoEditing by Nick Zieminski)
