BlackRock said "tectonic shifts" are under way in U.S. financial markets that will result in private credit funds financing more businesses while some banks struggle to compete.
The asset manager concluded that the movement of cash to money-market funds from bank accounts will diminish lenders' ability to finance small and mid-size firms, BlackRock Investment Institute said in a paper set for publication on Oct. 17.
The paper, by executives including Jean Boivin and Alex Brazier, found that banks probably will need to pay more interest to attract and retain deposits, crimping profits and "potentially discouraging them from lending as much," they wrote.
Money-market funds now hold $5.7 trillion in the U.S.
"U.S. banks are likely to compete aggressively for deposits by raising the interest rate they offer customers," and smaller banks have already begun doing that this year, according to the paper. "This will erode some of the advantage they had in extending loans from being able to fund them with cheap deposits."
Last week, three of Wall Street's biggest banks reported robust net interest income for the third quarter, but they warned of tougher times ahead because of an uncertain economic environment and more stringent capital regulations. J.P. Morgan Chase & Co. Chief Executive Officer Jamie Dimon said in July that the his industry's nonbank rivals, including hedge funds as well as private credit and private equity firms, are "dancing in the streets" because of the looming restrictions on lenders.
BlackRock and other money managers have spent much of this year seeking to expand in the $1.6 trillion global private credit industry, and its analysts said in the new paper that they now see investment opportunities over at least the next five years.
Still, private credit funds are "not immune to the tough economic backdrop," according to the paper, whose authors said higher financing costs may take a toll on borrowers.