How Banks and Private Credit Became the Best of Frenemies

Episode Summary

Executive Summary: The episode examines how private credit and banks are increasingly intertwined rather than purely competitive. Guest Hugh Van Steenis argues private credit is still small but growing fast, with banks using it to lay off risk, optimize capital, and expand lending, while private credit firms use insurance capital and partnerships to reach new asset classes like asset-backed lending, commercial real estate, and mid-market finance.

Main Topics: Banks and private credit as “frenemies” (Priority: 5/5): The hosts frame the relationship as a mix of competition and cooperation: private credit has expanded outside regulated banking, but banks are also partnering with it to recycle risk and preserve growth. Post-crisis regulation and risk migration (Priority: 5/5): Van Steenis argues that post-2008 banking rules pushed risky lending out of banks and into private credit, creating a parallel credit system that now handles leverage lending and mid-market loans. Bank capital optimization and synthetic risk transfers (Priority: 5/5): Banks can keep originating loans while selling off junior or tail risk through direct participations, balance-sheet structures, or synthetic risk transfer deals, improving capital efficiency. Insurance capital as a growth engine (Priority: 5/5): Private credit firms are increasingly funded by insurers seeking long-duration assets, especially via annuity and insurance-linked platforms, which lowers their cost of capital and broadens investable assets. Next frontier: asset-backed lending and commercial real estate (Priority: 4/5): Van Steenis says the next big private credit opportunities are specialty finance/asset-backed lending and commercial real estate, where banks and private credit can partner or compete for originations. Banking’s winner-take-most dynamics and tech/data (Priority: 4/5): The discussion expands into how large banks are pulling away from smaller rivals through tech scale, outsourcing, AI, and data advantages, while private credit also invests in tech to sharpen sourcing and underwriting. Regulatory and systemic-risk concerns (Priority: 4/5): While private credit is seen as relatively low systemic risk today, regulators worry about hidden leverage, retail wrappers, interconnectedness with banks, and opaque exposures to financial institutions.

Key Arguments: Private credit is still relatively small versus banking and public debt markets, so its importance comes more from growth and strategic displacement than absolute size. Post-2008 regulation successfully pushed risk out of banks, but banks now help reinsert that risk through partnerships, securitizations, and risk transfers. Top banks are using private credit to recycle capital faster, preserve client relationships, and keep originating loans without holding all the risk. Private credit firms are moving beyond leveraged loans into asset-backed lending, investment-grade-adjacent assets, and commercial real estate. Insurers are central because they provide long-duration capital and are willing to accept a modest spread pickup over public bonds, making private credit structurally cheaper to fund. The biggest systemic concern is not average leverage, but hidden leverage, concentrated tail risk, and potential retailization of illiquid assets. Large banks are increasingly “winner take most” businesses because of tech stacks, scale in origination, and data advantages; smaller institutions rely on third-party vendors and platforms. AI and data management are becoming critical in underwriting, operations, HR, and compliance, but black-box models raise regulatory and bias concerns.

Data Points: Private credit market size (official stats): $1.7 trillion - Preqin estimate cited by Hugh Van Steenis; excludes some insurer-related mandates Private credit market size (broader estimate): $2.5 trillion to $3 trillion - Van Steenis’s estimate including insurer direct mandates and related capital Investment-grade bond markets: $9 trillion - Used as a comparison showing private credit is still small European banking assets: $32 trillion - Used as a comparison showing private credit is still small Private credit share of leveraged loans in 2023: ~90% - Van Steenis said private credit players wrote about 90% of all leveraged loans during the unusual 2023 macro period Asset-backed lending market in the U.S.: $5.5 trillion - Cited as a major target market where private credit has less than 5% share Private credit share of asset-backed lending: <5% - Van Steenis’s estimate of current penetration in the U.S. specialty finance market U.S. consumer mortgages and commercial real estate market: ~$25 trillion - Broader target market if private credit expands into mortgages and CRE Private credit share of that broader market: ~2% - Current estimated share across consumer mortgages and CRE Bank lending peak as share of corporate lending: 1973 - Van Steenis noted 1973 as the peak of bank lending as a percentage of lending to corporates Bank-private credit deals in prior 12 months: 14 - Number of banks that tied up deals with private credit in the 12 months to September Bank-private credit deals in previous comparable period: 2 - Only two such deals in the prior 12 months before the snap-up in activity Blackstone assets from insurers: $221 billion of $432 billion - Discussed as evidence that insurers are a major funding source for private credit firms Blackstone assets from insurers (share): Over 50% - Calculated from the cited figures; Van Steenis explicitly said over half now come from insurers Top private credit firms’ insurer-funded assets: ~40% - Van Steenis’s estimate for the top 10 firms Industry-wide share of assets from insurers: ~30% - Van Steenis’s estimate for the private credit industry as a whole Bank lending to non-bank financial institutions: 27% - Liberty Street Economics / Fed New York figure cited for banks’ loans to hedge funds, private equity, private credit, and similar entities Fixed-income pickup for insurers: 150 to 175 basis points - Expected spread pickup from buying private credit/private bonds instead of public bonds Mid-market loan size: $30 million to $75 million - Described as a segment often too small for the largest banks to prioritize Broader direct-lending mid-market range: $30 million to $100 million - Van Steenis’s rough definition of direct lending to mid-market companies Family office market: $9 trillion - Described as the global family office pool private credit is targeting for wealth channels

Pivotal Quotes: "private credit allows me to recycle risk more quickly, I can lend more" — Hugh Van Steenis: Explaining why top banks view private credit partnerships as an opportunity rather than just a threat "we are now retranching the banking system" — Hugh Van Steenis: Describing how banks are laying off junior risk while retaining senior exposure and relationships "what you don't know, scares you" — Hugh Van Steenis: On why regulators are pushing for more transparency and a consolidated view of bank-private credit exposures

Implications: Private credit is likely to keep expanding, but its biggest impact may be as a plumbing layer that helps banks, insurers, and asset managers redistribute risk. The main watchpoints are hidden leverage, retail wrappers, and whether today’s symbiosis becomes tomorrow’s systemic problem.