Banks may find it galling to see lightly regulated private credit making inroads into their business. But by and large, the growth of the sector is good news for the financial system. Rather than turning short-term deposits into long-term loans (a mismatch that has been known to trip up banks), funds tap into genuinely long-term capital, broadly matching the duration of their loans.
Yet that is only true insofar as private credit sticks to its core mission. As the industry expands, and stretches its tendrils towards new investors and new investment opportunities, there are some areas that should start to attract regulatory scrutiny.
For one thing, private lending is becoming increasingly enmeshed with the traditional banking system. Banks strike partnership agreements with private credit funds, and lend them money. That is not necessarily concerning given that the debt gets sliced up and banks end up holding the less-risky tranches on their balance sheets. It is also still tiny in the context of banks’ loan books. But the overall exposure — and whether it becomes concentrated with some particular lenders, or some particular private credit managers — is worth keeping an eye on.