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The concern here seems to be that the credit risk on the underlying borrowers is being transferred to banks through the loans made by the banks to the private c

The concern here seems to be that the credit risk on the underlying borrowers is being transferred to banks through the loans made by the banks to the private credit firms. But the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers (the same regulations and constraints that led them not to lend to the underlying borrowers in the first place). When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans.

JumpCrisscross 7mo ago
> the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers Yes. > the same regulations and constraints that led them not to lend to the underlying borrowers in the first place No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks. > When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans Correct. Assuming 1.5x leverage and 60% recovery, you'd expect no more than half of portfolio losses to transmit to their lenders.
- NoboruWataya 7mo ago
  > No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks. How is this inconsistent with what I said? I was just making the point that the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap.
  - JumpCrisscross 7mo ago
    > the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.
- hedora 7mo ago
  > secured loans which will be less risky than the underlying loans So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting. Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans? Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way! In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.
  - JumpCrisscross 7mo ago
    > where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting Yes. This is mathematically sound. > those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? AAA-rated CLOs performed with the credit one would expect from that rating. The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid. > I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans Defining independence in financial assets like this is futile. > there's no chance of correlated defaults in a bucket of bad business loans that's structured this way Software companies being ravaged by AI fears. > replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.
    - hedora 7mo ago

JumpCrisscross 7mo ago

> the banks' lending to the private credit firms is subject to the same regulations and constraints as their lending to other borrowers Yes. > the same regulations and constraints that led them not to lend to the underlying borrowers in the first place No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks. > When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans Correct. Assuming 1.5x leverage and 60% recovery, you'd expect no more than half of portfolio losses to transmit to their lenders.

NoboruWataya 7mo ago
> No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks. How is this inconsistent with what I said? I was just making the point that the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap.
- JumpCrisscross 7mo ago
  > the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.
hedora 7mo ago
> secured loans which will be less risky than the underlying loans So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting. Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans? Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way! In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.
- JumpCrisscross 7mo ago
  > where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting Yes. This is mathematically sound. > those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? AAA-rated CLOs performed with the credit one would expect from that rating. The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid. > I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans Defining independence in financial assets like this is futile. > there's no chance of correlated defaults in a bucket of bad business loans that's structured this way Software companies being ravaged by AI fears. > replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.
  - hedora 7mo ago