Marsh Pushes Fed to Free Bank Capital on AI Data Center Loan Insurance

Marsh & McLennan Cos., the world's biggest insurance broker, is pressing US regulators to let banks hold less capital against loans covered by credit risk insurance as lenders hunt for ways to offload data center exposure.

The demand for hedging AI-related finance has exploded. But US lenders have traditionally leaned on other instruments, because insurance does not free up regulatory capital for them, according to Azi Larsen, a managing director in Marsh's credit specialties practice.

"We've been doing a lot of advocacy around that in the US," Larsen said in an interview with Bloomberg News. "Hopefully we'll have a positive answer from the US regulators at the end of the year."

Why does timing matter now?

The Federal Reserve is set to complete its latest regulatory capital rules in the coming weeks. Vice Chair for Supervision Michelle Bowman said so at an event on Nov. 10. The package is expected to include a plan that would lower the capital surcharge for the biggest US lenders, and another that would change risk-based capital requirements for midsize and large banks.

That timetable gives Marsh a narrow window. A favorable answer would let insurers absorb part of the risk on AI-linked loans and let banks deploy the freed capital elsewhere.

How does credit risk insurance work?

The mechanism is simple. Lenders pay premiums to cover a percentage of losses on specific facilities. If a borrower defaults, the insurer pays out.

European banks have long used this tool to mitigate losses and release capital that can then fund more lending. US banks have not enjoyed the same treatment from their regulators.

Two concrete deals show where the market is heading:

• Barclays Plc has been looking to buy cover on more than $10 billion of data center debt.
• HSBC Holdings Plc has explored a similar transaction.

How big is the AI lending wave?

McKinsey & Co. projects global spending on data centers will hit $6.7 trillion by 2030. Debt financing is expected to play a much bigger role in that buildout, and finding different tools to manage risks has become "mission critical" for lenders, Larsen said.

That figure explains the urgency. Data center construction runs on borrowed money, and each loan adds exposure to a single, concentrated industry.

Marsh is active in arranging credit risk insurance for project finance, including deals tied to data centers. Despite the regulatory limits, US lenders are increasingly turning to the product to cap their exposure to certain borrowers or industries as the volume of AI-related lending balloons.

"Even if they don't get capital relief, they still see value in trying to use it," Larsen added.

What happens if the Fed says yes?

A rule change would align US banks with their European peers, who already treat credit risk insurance as a capital-release tool rather than a pure loss hedge. Barclays and HSBC exploring cover on more than $10 billion of data center debt shows the scale insurers could capture if the Fed's coming capital package recognizes the product.

By Daniel Okafor