Bank lending to securitization vehicles has continued to grow significantly more than credit provided to other financial entities, according to the Federal Reserve's
Financial Stability Report, and the increase appears to be driven by insurance companies addressing demographic changes.
The Fed's biannual report published November 7 showed banks' credit commitments to the category of financial entities comprising SPEs (special purpose entities), CLOs and ABS increasing by approximately 30% in the year before the end of 2Q 2025 and totaling upwards of $500 billion. That category's increase in the year before Q2 2024 was less if still significant, at approximately 18% for committed amounts for a total of about $450 billion. In both periods, the growth in loan commitments to the securitization category was significantly more than to the nine other categories of financial entities tracked by the Fed.
Elen Callahan, head of research and education at the Structured Finance Association (SFA), said that banks' lending to nonbank financial institutions started increasing after the Great Financial Crisis (GFC) and picked up in the wake of the Covid 19 pandemic. Fed data shows lending to the entities in the securitization category growing significantly starting in 2022, at a faster pace than the two other largest categories of financial entities banks lent to: other financial vehicles and real estate lenders and lessors.
"It's really tied to the need for insurance companies to fund a growing number of retirees who are buying annuities," Callahan said, adding that approximately 20 million people are anticipated to retire over the next five years.
Many of those people are purchasing annuities that are offering returns in the 5% range, and insurance companies must match that liability with assets yielding a similar amount. Securitization assets, especially the esoteric variety, offer significantly wider spreads than corporate bonds, and asset managers servicing insurers are stepping increasingly into the structured finance market to meet their annuity yield targets.
For the same reason, insurers are also increasing their exposure to private credit, and Callahan noted that increasingly popular recently have been transactions offered in the private credit market that use securitization techniques.
"The cashflow is coming from a pool of assets, and deals have senior and subordinated classes and may have credit enhancement aside from the subordination, but they're being offered as club deals to a handful of asset managers," Callahan said. "The transactions tend to be smaller than more public Rule 144A deals, and they're growing in size."
The growth in bank lending to securitization entities recorded by the Fed likely stems largely from funding these securitization-related transactions, Callahan said, including the "warehouse" facilities used to gather the assets to be used in the term securitizations.
"Banks are providing the credit to allow nonbank financial institutions to operate on a scale that they could not support with their equity alone," she said.
