US big banks face growing risks from non-banks aka private credit.

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Non-bank financial institutions are increasingly posing risks to America’s big banks, according to a post on the New York Fed’s Liberty Street Economics blog. During times of heightened market-wide stress, non-banks seek term loans and lines of credit, putting pressure on banks to provide liquidity. This reliance on big banks could lead to “vectors of shock transmission and amplification,” potentially requiring authorities to intervene. Unlike large banks, non-banks operate under less restrictive regulations, and their interconnectedness with banks has risen significantly. Commercial real estate loans, in particular, face challenges due to rising vacancies, declining valuations, and higher interest rates. Recognizing this interconnectedness, financial regulation and systemic risk surveillance are crucial.

via YAHOO:

Non-bank financial institutions pose an increasing risk to America’s big banks, economists said on Thursday in a post on the New York Fed’s Liberty Street Economics blog.

During times of heightened market-wide stress, demands for liquidity mount on banks as non-banks seek term loans and lines of credit. This escalating reliance on big banks could result in “vectors of shock transmission and amplification, forcing authorities to intervene and do so en masse,” the researchers said in the post, adding that the extent of these market disruptions “could be rather severe.”

Unlike large banks, non-banks operate under less restrictive regulatory regimes and monitoring standards. The growing bank and non-bank interconnectedness means that risks that used to lie solely with banks are now being repackaged between banks and non-banks.

The blog authors estimate that the correlation of bank and non-bank risk has risen steadily from about 65% prior to the 2008 financial crash to upwards of 80% now.

32 years in commercial banking. “Private Credit” scares me too. I’ve seen what happens when unqualified individuals get credit… not pretty. And these hedge funds think they are smarter than Einstein. Bad combination here. To think the banks turned borrowers down only to buy back a piece of private credit is hilariously ironic. But my guess is regulatory folks won’t put up with it… forcing the banks to write down. The real risk is the insurance industry buying… no comparable regulators there. “Private Credit,” I suspect, is merely hard money loans in a different package for securitization and sale to third parties. Smells an awful lot like “subprime lending” circa 2006. We saw what happened there!

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h/t SwimAntique4922

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