Terms and Conditions

Please read these conditions carefully before using this site. By using this site, you signify your assent to the following terms and conditions of use without limitation or qualification. In particular, you consent to the use of all cookies on this website for the purposes described in the terms of use. If you do not agree to these terms or to the use of cookies as described below, do not use this site. AllianceBernstein may at any time revise these terms of use. You are bound by any such revisions and should therefore periodically visit this page to review the then current terms of use to which you are bound. This site is for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein.

Terms Of Use

This site is solely intended for use by professional/institutional investors and institutional-investment industry consultants.

Do you wish to continue?

menu
 
Policy & Regulation Alternatives White Paper

Capitalizing on Credit Disintermediation

An Evolving Opportunity Set for Investors

June 11, 2014
6 min read

What You Need to Know

The process of bank disintermediation, where capital providers move closer to end borrowers, has been occurring in the US financial sector for some time. Today, it’s taking place around the world and is poised to accelerate, introducing a new set of investment opportunities.

Download
70%
US nonfinancial corporations
and real estate's share of private credit outstanding
$18.9T
Growth of nonfinancial corporate
and mortgage credit: 1980-2014
Insight
Banks have been exiting
certain lending businesses altogether
Authors
|

Perspectives on a Secular Trend

Credit providers play a critical role in supporting economic growth. Banks, capital markets and alternative credit providers (nonbank lenders such as asset managers, insurance companies, pension funds and specialty finance companies) efficiently allocate capital to borrowers. The financial health of individuals and businesses depends on reliable access to financing to manage everything from daily cash-flow needs to larger-scale business expansion. This access in turn fuels employment growth and consumer spending. Through a virtuous cycle, broad access to credit becomes a driver of economic growth.

As global financial markets mature, this process is facilitating a trend of bank disintermediation—with providers of capital moving closer to borrowers. This trend is secular, much like in other consumer-driven industries such as retail, where customers increasingly prefer shopping online to visiting stores. Although this evolution has been firmly under way in the US for many years, it has been accelerating.

For instance, only three decades ago, banks provided more than 50% of the total credit extended to finance US nonfinancial corporations and real estate (second display below), two sectors that together represent more than 70% of total private sector credit outstanding. This figure has steadily declined, to approximately 23% today, whittled down by the growth of capital markets and alternative credit providers (Display below), including government-sponsored entities (GSEs)—Fannie Mae, Freddie Mac and Ginnie Mae. Since 1980, nonfinancial corporate and mortgage credit outstanding has grown by approximately US$18.9 trillion. Of this growth, US$3.9 trillion has been attributable to banks and US$15.0 trillion to nonbanks—US$6.1 trillion of this has been from GSEs.

Steady Growth of US Capital Markets and Alternative Credit Providers
Bank vs. Nonbank Market Share

Through December 31, 2013
Source: US Federal Reserve and AB

Europe’s financial system is much more bank-centric than that of the US, with banks currently providing approximately 45% of credit to European nonfinancial corporate borrowers. European banks are larger and their market share is more concentrated than that of their US counterparts. Moreover, differences in law, regulatory regime, language and currency have constrained the development of European capital markets relative to those of the US. This combination of factors has made bank disintermediation slower to take hold in Europe. Still, it is beginning to gain momentum in Europe on the back of postcrisis re-regulation.

 

We expect bank disintermediation to gain momentum in the years ahead as increasing regulatory burdens, capital requirements and operational costs force banks out of certain lending businesses. The ramifications of Basel III and Dodd-Frank have yet to be fully realized, but many borrowers have already been forced to secure new credit providers in select areas, including commercial real estate and middle market corporate credit, to avoid financing shortfalls. There’s also a natural progression toward alternative credit intermediation in other credit-intensive end markets such as residential real estate and infrastructure, whose longer investment horizons are mismatched with bank-liability structures subject to daily liquidity requirements.

Evolving Roles of Participants in Credit Intermediation Channels

Source: AB

As a result, we expect the role of banks to continue to diminish in importance as alternative credit providers continue to move closer to end borrowers. This will unfold in different ways and to varying degrees depending on the market segment and region (Display above). In some instances, banks may shift their focus from sourcing, evaluating, holding, financing and servicing credit to facilitating transactions. In other areas, banks may partner with alternative credit providers to provide financing, or may exit the financing process altogether.

Key Investment Implications

We believe that bank disintermediation will have specific ramifications for credit investors:

  • At its core, the move to broader financing sources may fundamentally alter the best way to approach fixed-income asset allocation.
  • Disintermediation is already fueling long-term credit investment potential in four key market segments: middle market corporate, commercial real estate, residential real estate and infrastructure. It’s also generating collateralized specialty financing opportunities across regions and market segments.
  • As the marketplace evolves, it’s introducing opportunities for alternative credit providers to deliver capital to address shorter-term dislocations and supply/demand imbalances.

These developments may seem to signify notable changes, but they actually represent natural outcomes of a continued evolution that should benefit debt capital consumers and providers as well as the economy as a whole.

Bank Disintermediations: A Historical Context

The progression from a bank-centric financing model to a capital markets–based model and, more recently, to an alternative credit provider–based financing model, has been happening for many years. Indeed, there’s a long history of disintermediation being brought about by changes in legislation, regulation and public policy.

A notable first step in this progression took place in the latter part of the 19th century: the substantial capital investment required to build out the US rail and utility infrastructure was financed primarily by bond issuance to private investors. By the end of the century, the corporate bond market had meaningfully expanded, reflecting the technological and industrial developments that had been taking place across the country.

This trend continued in the US throughout the 20th century. In 1968, Ginnie Mae issued its first guarantee of a mortgage pass-through security, creating the US mortgage securitization market. In 1971, Freddie Mac packaged the first mortgage pass-through security composed primarily of private mortgages. In the same year, the first money-market fund was introduced, which began the disintermediation of the short-term corporate funding market. These developments were revolutionary at the time. Today, however, they’re essential to the daily functioning of the US economy: agency mortgage-backed securities and money-market funds account for more than US$7.0 trillion and US$2.5 trillion of investor assets, respectively.

The US corporate bond market grew from less than US$500 billion in 1980 to more than US$6.0 trillion currently, replacing banks as the predominant source of financing for US companies. From the 1990s until the financial crisis unfolded, securitization techniques previously developed in the residential mortgage market began to be applied more broadly—we witnessed the growth of the asset-backed security (ABS), non-agency residential mortgage-backed security (RMBS), commercial mortgage-backed security (CMBS) and collateralized loan obligation (CLO) markets.

Past performance, historical and current analyses, and expectations do not guarantee future results. There can be no assurance that any investment objectives will be achieved. The information contained here reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AB or its affiliates.

The views expressed herein do not constitute research, investment advice, or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

About the Authors

More For You

Two line charts indicating healthcare stock valuations vs. future earnings significantly diverge
Investment Insights
Seeking Stocks with Vitality in the Volatile Healthcare Sector

Healthcare stocks are in much better shape than equity investors might think.

Vinay Thapar | February 24, 2025
A multi-colored ribbon of aurora borealis lights in the night sky, framed by bare tree branches.
Investment Insights
Merger Arbitrage: The Stars Could Be Aligning

Is an M&A boom brewing?

Scott Schefrin, Eugene Smit | February 10, 2025
An iron chain is suspended between two cargo vessels, blocking access.
Economic Perspectives
An Early Look at the Implications of Tariffs and a Trade War

After the trade war’s opening salvoes, tensions seem set to last for some time.

Eric Winograd | February 04, 2025
© 2025 AllianceBernstein L.P.