Out of the Shadows and into the Light: Private credit’s quiet rise to systemic risk
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Out of the Shadows and into the Light: Private credit’s quiet rise to systemic risk
The last decade has reshaped the architecture of global finance. Lending once channelled primarily through banks has increasingly migrated into the hands of non-bank financial institutions (NBFIs), such as private-credit funds, real-estate finance vehicles, hedge funds and specialist lenders that operate largely outside the supervisory perimeter. With this shift, what regulators once labelled the “shadow banking system”, which shifts credit intermediation and other financial activities outside the regular banking system, has become a central force in credit creation and could prove dangerous as risk is pushed to lightly regulated areas of the financial system.
Today, the global private-credit market is estimated to exceed $3 trillion. It has grown more than five-fold since the global financial crisis, faster than almost any other major asset class, and is the primary lender to many mid-market firms. Companies that find banks’ balance sheets constrained by regulation or capital rules increasingly turn to private-credit funds for financing tailored to their specific needs.
From fringe to financial core
Private-credit’s appeal is rooted in flexibility: faster approvals, bespoke terms, and financing solutions banks often can’t provide. Pension funds and wealth managers, hungry for yield, have poured capital into the sector. As a result, NBFIs are now woven deeply into the plumbing of global finance.
Crucially, banks are not bystanders. They supply:
- Credit lines and leverage
- Derivatives and hedging
- Warehouse facilities for loans
- Capital commitments as investors
This symbiotic relationship has tightened the linkages between regulated and non-regulated finance.
Opacity: the unresolved concern
The International Monetary Fund and Bank of England have recently warned that while private credit supports real economic activity, it also operates in an environment of lighter disclosure, less-tested liquidity structures and opaque leverage. Risk builds out of view and can cascade quickly.
Unlike banks, private-credit funds do not hold deposit-based liabilities. They rely on institutional capital and financing markets. That structure can be an advantage, insulating the retail system from classic bank-run dynamics, but only if liquidity remains available.
A problem for tomorrow or a pressure point for today?
No one is arguing that a crisis is imminent. The BoE is preparing voluntary stress tests of private-credit and NBFI exposures not because the system is flashing red, but because it isn’t monitored nearly as closely as banks.
The broader worry is timing: when the credit cycle turns, collapses tend not to unfold slowly – they snap.
Highly leveraged borrowers, elevated asset valuations and tighter financial conditions could expose fragilities far faster than policymakers are prepared for. In the real-estate sector especially, loan-level stress remains uneven, and stress-correlations are poorly understood.
The optimistic counterview
Many practitioners argue that the rise of private credit is not a failure of banks, but an evolution of the market:
- Diversifying funding away from the banking system reduces systemic concentration
- Many deals employ senior-secured structures and robust covenants
- Losses fall mainly on institutional investors, not taxpayers
Rather than a threat, they see resilience: a parallel channel that broadens credit access and supports growth.
Private credit sits at the crossroads of modern finance: part innovation, part necessity, and part enigma. Its rapid rise reflects both the strengths and limitations of today’s banking system, namely more regulation in the core has pushed risk outward, which is rational when markets are calm and capital plentiful.
But financial stability is a collective good. As private lenders take up a larger share of global credit, the system has become more interconnected, more complex, and more data-poor. These blind spots matter, because crises rarely emerge from where we are watching.
The challenge is clear, and perhaps one which perennially before policymakers: catch up to the market’s evolution before the market tests the system’s resilience
If transparency improves, oversight sharpens, and risk transfers are better understood, the rise of private credit could mark a new era of diversified, durable financing. If not, the very shift that was meant to reduce fragility may end up revealing it.Either way, this is no longer a shadow story but the future of finance taking shape in real time.
References
- IMF (2024), Global Financial Stability Report: The Rise and Risks of Private Credit.
- Deloitte (2024), Private Credit Growth and Corporate Financing.
- PwC (2024), Private Credit: Rewiring Credit in Capital Markets.
- Macquarie Capital (2024), Private Credit Market Set for Significant Growth in 2025.
- BlackRock (2024), The Growth of Direct Lending.
- FSB (2024), Global Monitoring Report on Non-Bank Financial Intermediation.