In your article “US banking regulators warn of risks in leveraged loan market” (Report, FT.com, February 14) you are right to point out the risks from rising debt leverage ratios and loosening lending standards. It is also correct to highlight that more risky lending has been done by non-banks than banks. But risk aversion alone is not a strategy. Banks need to keep lending to support their investment and transaction banking networks. As Jamie Dimon, head of J.P. Morgan, has warned for many years, banks are being marginalised by the rise of non-bank lenders. It has long been lamented on Wall Street that a new generation of bankers and risk managers have grown up not having seen an interest rate tightening cycle. In other parts of the bank, higher rates will be positive news, but corporate lending comes with the threat of a potential increase in non-performing loans.
Corporate lending suffers greater losses in an economic downturn than consumer and property lending, owing to lower levels of collateral. Technology-led disruption and inflationary cost pressures will lead to more differentiation between corporate borrowers in this credit cycle. Sophisticated non-bank lenders are armed with quants and technologists able to capture and make sense of the huge proliferation of data.
Banks need to fight back. They must look for early warning signals of default. At Galytix we believe that systematic processes combining artificial intelligence with human knowledge of the industry are crucial to bringing together a bank’s internal data with the wide range of external data on borrowers, peers and supply chains.
As Warren Buffett says: “Only when the tide goes out do you discover who is swimming naked.”