Bank capital proposal frees six times more headroom for securitizations than for corporate loans

A risk weight is a divisor, and the two headline numbers in this proposal are not the same size. Cut the floor on certain senior securitization exposures from 20% to 15% ^[7] and the same capital supports about a third more of them, since 20 divided by 15 is 1.33 ^[2]. Cut the corporate loan weight from 100% to 95% ^[11] and the same capital supports about 5% more ^[3]. The securitized route frees roughly six times the headroom of the direct loan ^[4].

None of that relief is aimed at private credit. Chen Xu, a partner at Debevoise & Plimpton, said the floor cut would make it "more attractive" for banks to be senior securitized lenders ^[8], and he described its reach. "The catch is that it applies to any sort of securitization, so it ranges from private credit fund lending to auto lending to student loans and mortgages," Xu said ^[9]. "It's sort of universally lowering the floor." ^[10]

The place the proposals reach funds directly is the corporate exposure treatment, because that is what a warehouse line is ^[15]. "One is down to 95% and another to 65%, and because they're corporate exposures, it applies ... if you're doing direct private credit investment yourself, or if you were setting up a warehouse line or some kind of other fund financing mechanism," Steele said ^[16]. A 65% weight instead of 95% supports about 46% more exposure per dollar of capital ^[5]. The article does not say which exposures carry the 65% weight.

Steele, an assistant professor at the University of North Carolina School of Law and a former Treasury official in the Biden administration ^[3], put the tracing problem this way: "One of the issues with both the opacity and the complexity of private credit lending is getting a full sense of the financing chain, which is a really complicated picture to try to actually build out," he said ^[2]. Banks' ties to private credit are already growing, and limited public disclosure makes the full extent of those relationships difficult to assess ^[18].

Two readings sit inside the same draft. Xu said the point of the changes "is to make the rules more risk-sensitive" ^[12] and that they will let banks "lend to credit funds that are more creditworthy if they do the homework" ^[13], while also saying the same package could discourage banks from taking junior positions or lending to less creditworthy funds ^[14]. Steele's version runs the other way: "The safest assets we know have the lowest return, the riskiest assets have the highest return," he said ^[5], and he said lending to private credit funds can return more than traditional loans, which increases banks' appetite for it ^[4].

I would expect both effects, which is the uncomfortable part: bank exposure to funds gets more senior and larger at the same time. The composition claim is testable against securitization reporting. The volume claim runs into the disclosure limits the article describes ^[18]. If banks' junior positions in credit funds shrink as Xu expects while warehouse lines and fund financing facilities stay flat, then the interconnectedness warning around these proposals ^[19] has nothing behind it yet.