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To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
by gzread 8mo ago
To private credit firms. Most of what banks do is private credit, the news is them funding private credit firms.
- deleted 8mo ago[deleted]
- happytoexplain 8mo agoI don't know a lot about finance. What is the definition/significance of "firm" in this context (if that's not a complicated question)?
- lokar 8mo agoA private credit firm is a non-bank entity that raises money from wealthy investors, pension funds, etc to loan out to businesses. The funds are generally locked up for several years to match the duration of the loans. They also borrow money from banks to add leverage to this basic setup.
- aewens 8mo agoNot who you asked, but I think making the nuance between retail and corporate credit. With firms being corporate credit (i.e. we aren’t talking about individuals / retail).
- lokar 8mo agoNo. There are kind of 3 types of loans: - bonds. Loans interned to be bought by a range if investors and traded over time. Arranged and unwritten by investment banks. - bank loans. The classic loan. The bank takes depositor money (that the depositor can take back anytime!) and loans it to someone or some company. The bank holds the loan - private credit. Like a bank loan, but they get their money from long term investments by wealth people and institutions, add bank loans for leverage, and then hold the loan.
- JumpCrisscross 8mo ago> The bank holds the loan These are mostly syndicated. The traditional difference between loans and bonds was bank versus investment bank. The modern difference is in underwriting technique, degree of syndication/securitisation and loans mostly being floating and bonds mostly being fixed.
- lokar 8mo agoI mean the classic “it’s a wonderful life” model
- JumpCrisscross 8mo agoConvergent evolution in finance is actually a pet interest of mine. It seems like it's mostly driven by regulation. But the more you stare, the more the regulation appears like a canyon wall and the hydrology customs and connections. I'm not sure what the underlying geology is, however. Something bigger than customs or laws, but not so grand that it becomes ethereal.
- lokar 8mo agoThe pattern I see is: The Banks get in trouble, and Gov has to step in. So Gov, reasonably, add regulations and restrictions. But the law can't be really specific, it requires gov employees to actually examine the bank and make decisions (eg about risk levels, etc). The banks have a really large incentive to chip away at the effectiveness of the regulation. They hire lots of lawyers, consultants, notable economists, etc and just keep pushing on these rank and file gov regulators. They buy influence with politicians, and use that to pressure the regulators. They hire some of the regulators at very high pay, sending a signal to the others: play ball and a nice job awaits you. Over time, they just wear down the regulators. The rules are interpreted to be mostly ineffective and nonsensical. Often at that point the politicians come in and just de-regulate. The banks just have the incentive and focus to keep at it every day for years. No one else with power is paying attention.
- JumpCrisscross 8mo ago> What is the definition/significance of "firm" Broadly speaking, privately-held companies are called firms. Colloquially, it tends to connote closely-held companies.
- kgwgk 8mo agoFirm is used for partnerships, where the company is not a legal entity itself. An incorporated company may be closely held but it wouldn’t be a firm in that sense. (However, it may be customary to talk about law or accouting firms, for example, regardless of their actual legal form.)
- ajross 8mo agoThat's not correctly stated. "Private Credit" is defined as non-bank lending. Banks are doing "public" lending in the sense of being regulated. Private lending is any sort of financial instrument issued outside of those guard rails. It's generally felt to be risky and volatile, but useful. Basically, it's never illegal just to hand your friend $20 even if the government isn't watching over the process to make sure you don't get scammed. This is the same thing at scale.
- JumpCrisscross 8mo ago> That's not correctly stated It is. (EDIT: It's a mixed bag. OP was correctly calling out a definitional error.) Banks have loaned $300bn mostly to private-credit firms. Those firms then compete with the banks to do non-bank lending. It's a weird rabbit hole and I'm grumpy after a cancelled flight, but it feels like I'm in the middle of a Matt Levine writeup.
- ajross 8mo agoGood grief. I was responding to "Most of what banks do is private credit", which is wrong. Bank lending is not private credit.
- JumpCrisscross 8mo agoOh, gotcha. Sorry, got hung up on the first bit.
- klodolph 8mo agoIsn’t private credit defined in part as “lending by non-banks”? Like, when a bank originates a mortgage, that mortgage gets traded, much like private debts don’t.
- KellyCriterion 8mo agoNo, there is a huge difference: - when a bank creates a loan, this has an effect on money supply in total - when a private credit company "gives" a loan, it has no effect on total money supply and from balance sheet perspective its an accounting exchange on the asset side