Kristen Shaughnessy’s Post

"But, 16 years later, some experts believe new risks are emerging. And this time, they are linked to highly indebted companies backed by private equity firms, which are part of the growing but opaque portion of the financial system known as the shadow banking sector. Shadow banking refers to financial firms that face little to no regulation compared with traditional lenders, and includes businesses such as hedge funds, private credit and private equity funds." "And in June, the financial policy committee highlighted risks related to the private equity industry more broadly: “Vulnerabilities from high leverage, opacity around valuations, variable risk management practices and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors.” And Govt wants pension money piling into this?

With financial markets hitting all-time highs and the "alpha-dogs" left only with "Beta" on the table, maybe it is time to remember "Preservation of Capital" as a primary goal. Regulators have warned about a lack of transparency around private loan valuations and potential liquidity mismatches over the last year or so, as the market has ballooned to $1.7 trillion in size and interest rates have remained high.

🚀 The Rise of Private Credit: A Transformative Trend 📉 As private credit continues to reshape the financial landscape, it's essential to understand both its potential benefits and the challenges it presents. The recent Yahoo Finance article delves into this debate, highlighting diverse opinions on Wall Street. Key points: 1. Diverse Opinions: Private credit is seen as a vital alternative to traditional lending by some, while others warn of potential market risks. 🤔💬 2. Growth Drivers: Factors such as low-interest rates and tighter bank regulations are fueling this rise. 📈🏦 3. Market Impact: The expansion of private credit is set to influence investment strategies and regulatory frameworks. 📊⚖️ 💬 What are your thoughts on the rise of private credit? #PrivateCredit #Finance #Investment #MarketTrends #AlternativeInvestments

Before the 2008 financial crisis, the banks had carried truckloads of off-balance sheet liabilities without sweat, but something suddenly changed in 2008 to cause them to collapse. What was that? Similarly, the same banks have carried the same kind of off-balance sheet liabilities since the 2008 financial crisis without any trouble.  So, the question should be asked: "What circumstance would trigger the banks' inability to carry the liabilities and collapse under its weight?" Ben Bernanke should be held accountable for answering this question during the Student Uprising: Why was AIG simultaneously a going concern and a gone concern on the eve of the government bailout, and why did he and the Federal Reserve decide that AIG was in bankruptcy instead of insolvency, which was the legal premise for the Fed to wipe out AIG's shareholders to bail out the derivatives counterparties? Bernanke should be the key witness during the mock re-litigation of the Start Int'l v. U.S. to answer these tough questions.

Regulation is key to the orderly functioning of a financial system. Participants in the financial services industry should welcome sensible regulation. This FT article reflects badly on the Bank of England as the concern raised is implausible. “The prospective correlations are everywhere, and it’s not difficult to imagine a scenario, such as malpractice at a financial sponsor or the bankruptcy of multiple portfolio companies, where risk correlations increase significantly, and liquidity evaporates, leaving banks open to severe, unexpected losses,” said Jackson." There are far bigger issues about which the Bank of England should worry. The quote above misunderstands portfolio theory, the growth of private credit, and the concept of correlated risks. It is frustrating that senior Bank of England regulators are spending their time on implausible scenarios and not on those more likely to cause a harmful impact.

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” The Bank of England is concerned about financial institutional risk associated with the rapid growth of private capital markets. A PE or Private Credit market crash would trigger a liquidity event which spawns crisis, but also massive opportunity. It will be yet another consequence of regulation and mispriced money in the wake of the 2008 GFC! #markets #investing #economy #privatecapital

Understanding Significant Risk Transfers (SRTs) – A Growing Opportunity in US Banking 💼📈 The increasing wave of regulations is driving financial markets to shift from heavily regulated banks to the uncharted territory of private credit, often referred to as the “Wild West” of finance. At the same time, these regulations are pushing US banks to innovate and adapt. One Innovation is the rise of Significant Risk Transfers (SRTs) in the US banking sector—a strategy long embraced in Europe but now gaining momentum stateside. 🌍💡 SRTs are reshaping the way banks manage risk while offering compelling opportunities for investors. What Are SRTs? 🤔 SRTs allow banks to offload the riskiest portion of their loan portfolios—up to 15% of potential losses—to investors. 💸 In return, investors receive periodic payments and, if loans perform well, can earn solid returns. These deals help banks free up capital to lend more, create stronger balance sheets, and diversify risks. 💪📊 Why Now? ⏰ Several factors are driving the surge: 1. Regulatory Pressure: Proposed tougher capital rules under Basel endgame make SRTs an attractive way to reduce required reserves. ⚖️ 2. Market Shifts: Recent regional bank crises and economic uncertainty have pushed banks to explore innovative risk management strategies. 📉🏦 3. Investor Demand: With over $16.6 billion in SRTs issued globally in the first nine months of 2024, the appetite for these investments is growing, even as tighter spreads reduce returns. 🌟 Opportunities and Risks ⚠️ For investors, SRTs can generate double-digit returns, appealing to pension funds and asset managers. 📈💰 However, as the market expands, new participants with varying expertise may introduce risks, including: • Loose deal terms: Insufficient scrutiny of loan quality could impact returns. 🔍 • Leverage risks: Excessive borrowing by investors could create systemic vulnerabilities. 📉💥 • Flowback risks: If newcomers pull out during market stress, risks could revert to banks. 🔄 The Bigger Picture 🌐 SRTs illustrate a broader trend of banks evolving from traditional balance-sheet lending to risk-sharing models. While some liken this to the asset-backed securities boom pre-2008, proponents argue SRTs are better structured, with banks retaining “skin in the game.” 🏦✅ As Neal Wilson of EJF Capital aptly puts it, “SRTs are a win-win for banks and investors.” 🙌 They allow banks to grow their balance sheets, investors to earn attractive returns, and regulators to spread potential risks, enhancing financial stability. 💼💵 What’s Next? 🚀 The US SRT market is still in its infancy, with regulatory hurdles and market dynamics shaping its future. But one thing is clear: this is a space to watch, whether you’re in banking, investment, or risk management. 👀 #Finance #Banking #RiskManagement #Investment #Innovation #FinancialStability

"The biggest capital savings will come from changes to how banks will have to calculate potential losses from operational risks...banks had been pushing regulators to reduce the risk weights for fee income associated with lending services, such as investment banking." #economy #economics #economicoutlook #banks #banking #bankers #fed #federalreserve #fedpolicy #finance #basel #baseliii #investors #investments #investing

In this quarterly update, the Credit Team discusses the changing investor preference for money funds, the reliance on debt for repurchases, growing unsecured consumer balances, and the resilient housing market. Read More: https://bit.ly/3W4krit

Must read, by the International Monetary Fund, on the rise of the shadow banking sector and building vulnerabilities after the Global Financial Crisis of 2008/09.