Asset Exchange Connects a Network of Lenders to Customized Advice and Analytics

Trends in interest rates, deposit flows and loan demand have put a spotlight on banks’ balance sheets and, in turn, on their asset-and-liability management. While tapping brokered deposits and interbank networks for funding, on the asset side they can access a variety of loan transaction platforms.

PNC Financial Services Group saw an opening for a platform that not only matches loan buyers and sellers, but also provides balance-sheet and loan analytics and other advisory support, which is especially critical when it comes to underwriting commercial credit risk.

Unlike other loan platforms, PNC said in an August announcement, its PNC Asset Exchange “offers customized advice from PNC FIG [Financial Institution Group] Advisory’s team of seasoned traders to help customers experience greater success.”

Traditionally, loan counterparties relied on broker-dealers such as Stifel Financial and Raymond James to match trades over-the-counter. Recently launched institutional joint ventures Octaura and Versana have sought to bring transparency and trade-processing efficiencies to the syndicated loan market. Examples of marketplaces trading a variety of loans and offering analytics are provided by Jack Henry and LoanStreet.

 Charlotte McLaughlin, PNC Capital Markets

PNC Asset Exchange meets clients’ strategic needs by coupling the efficiency of Community Capital Technology‘s online marketplace with the bank’s trusted advisory services, according to PNC Capital Markets president and CEO Charlotte McLaughlin. She said the Asset Exchange can handle virtually any loan asset class and loan structure, whether individual whole loans, pools of loans, or participations in syndications. Participants include community and regional banks, credit unions, nonbank lenders, and large asset managers.

Risks and Complexities

David O’Connell, strategic advisor at Datos Insights, formerly Aite-Novarica Group, said such offerings can give banks agility in staying within concentration limits, such as when ensuring that commercial real estate exposure does not exceed a given percentage of the total portfolio. They also automate tasks at a time when banks face talent shortages.

Still, there are hurdles in underwriting transactions they purchased from third parties.

Jesse Honigberg, executive vice president, products and platforms, Customers Bank of New York, said the bank has analyzed and is “intrigued” by loan trading platforms, but delivery and execution of the transactions can be complicated. In third-party transactions, “the further you are from origination, the harder it becomes to model the actual performance and get a sense of the underlying borrower.”

Honigberg, who worked on an asset trading platform at a “stealth startup” for six months before joining Customers in January, and previously at Cross River Bank for three years, said banks will tend to put on the marketplaces bespoke consumer and commercial loans. He said that lenders are wary of the risk of loans that are outside of a direct relationship with the borrower, or that lack the standardization of those of government-sponsored enterprises and securitization trusts.

 Jesse Honigberg, Customers Bank

“If a lender has a well-performing, well-priced loan, why put it on the platform?” the banker said. “And if I need assets, am I really going to get it from a platform where others are likely trying to get rid of assets?”

That hesitation might lead lenders to stick to what they know. “The challenge all these initiatives have is they face a tremendous amount of inertia that’s hard to overcome,” Honigberg observed.

Ease of Access

PNC Asset Exchange does not provide assistance in the underwriting process. However, the bank has relationships with more than 1,000 financial institutions that could join the platform at no cost and provide liquidity almost immediately.

The Community Capital Technology (CCT) Loan Marketplace, in operation since 2018, has 1,300 bank and credit union members, ranging in size from $100 million to $300 billion in assets. Those members can avail themselves of PNC’s advisory services.

Members looking to anonymously buy or sell loans, ranging from consumer loans to syndicated loans to marine finance and aircraft loans, can set up filters based on upwards of 90 criteria to receive alerts about transactions meeting their specifications. PNC bankers then offer detailed advice via phone.

“We can do a lot of balance-sheet analytics to see how the loan fits into the client’s balance sheet, hedged or not hedged, and if they have questions about the loan, we can answer some of them,” McLaughlin said. There is no charge to join and use the platform, and transaction fees are incurred after a deal is completed.

CCT founder and CEO Garrett Smith said the “ability to marry PNC’s loan-level analytics with our balance-sheet analytics is very compelling.”

Faster Completion

While exchange members are responsible for their own underwriting, Smith added, “at least in the intermediate term,” transactions are unlikely to become fully automated.

Instead, he said, CCT is focused on establishing broad connectivity among lenders and borrowers, in contrast to – and with fees lower than – the longer-standing industry players’ OTC networks. Connecting participants directly, CCT’s platform aims for faster matching of buyers and sellers. Automating much of the process to complete a transaction, Smith said, will result in technology-driven efficiencies that will vary by the type of asset.

 Garrett Smith, Community Capital Technology

He said that $4.3 billion of live deals were available to buyers on the platform as of mid-September, up from $1.8 billion a year earlier, while demand from buyers was $6.7 billion, versus $3.8 billion a year earlier.

Honigberg said it is a plus if PNC Asset Exchange creates greater asset visibility. But “unless you can meaningfully reduce the friction around the acquisition of the actual assets [by standardizing loans on the platform], it is impossible to scale” to reduce participants’ due diligence on each transaction.

One solution may be to promote loans backed by well-understood collateral, so even if there are questions about the borrower, “As long as there is liquidity behind the collateral, you could end up creating an asset that’s more fungible, in theory,” the Customers Bank executive said.

Wrapper Solution?

Another possibility, Honigberg said, would be to write a wrapper instrument around loans on the platform, providing credit protection – essentially credit insurance – for a fee, as long as they conform to certain criteria.

“If you could attach credit insurance for another 150 basis points, you’d have people lining up to buy those assets, but such insurance would probably cost significantly more,” Honigberg said.

When asked if PNC will pursue a wrapper-type solution, McLaughlin said, “Not at this time. Our current focus is to facilitate a more efficient, effective and organized process to trade whole loans, whole loan pools, and participations in the secondary market.”