Private credit market hits $2 trillion with banks insurers and pensions dangerously tangled in. FSB warns the sector has never faced a real downturn and data is too patchy to track dangers. Bailey just admitted the shadow banking bomb is wired up and ticking.
Andrew Bailey has raised the alarm about a potential “shadow banking” crisis that could send shock waves through the global financial system.
The Financial Stability Board (FSB), which is chaired by the Bank of England Governor, warned in a new report that traditional banks, insurers and pension funds had become potentially dangerously intertwined with the $2tn (£1.4tn) private credit market, often dubbed shadow banking.
The shadow banking industry is where companies borrow from funds and private equity houses rather than banks. It has expanded rapidly in recent years as regulators around the world have tightened the rules governing mainstream banking.
However, the FSB, which works with central banks and governments around the world, warned that the private credit market had not been tested by a severe economic downturn, meaning any shock could result in unexpected consequences throughout the financial system.
John Schindler, the secretary general of the FSB, warned that private credit “could amplify stress in adverse scenarios, posing broader risks to financial stability”.
He added that it was difficult to monitor the true risks posed by the sector because data was so patchy. Mr Schindler said there were “significant data challenges preventing an accurate assessment of the total outstanding size of private credit markets and of the vulnerabilities that this sector contains.”
The warning came a day after HSBC announced a $400m hit tied to the collapse of Market Financial Solutions (MFS), a British shadow bank that collapsed amid allegations of fraud this year.
HSBC said the loss came after it backed another institution thought to have lent to MFS, highlighting how risk can spread throughout the financial system.
BlackRock just cut 5% off the NAV of its flagship publicly traded private credit fund — as distressed loans surge and recovery rates collapse. But the scariest part? What was quietly buried in today’s labor market data. This is the clearest warning yet that the private credit bubble is about to burst. Smart money is heading for the exits. You should too. Watch before it’s too late.