Odd Lots Can You Ever Actually De-Risk The Banking System?
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Nov 11, 2024 Steven Kelly, Associate Director of Research at Yale’s Program on Financial Stability and a financial markets expert, discusses the evolution of risks in the banking system. He explains the shift of lending from traditional banks to private credit, revealing how this has created new challenges. Kelly emphasizes that while risks may appear to be minimized, they often return, especially when outside entities rely on banks for leverage. The conversation highlights the need for proactive regulation to manage these evolving financial landscapes.
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Risk Migration
- Risky financial activities have shifted from banks to private credit and hedge funds.
- This looks good on paper, but the risk might find its way back to banks through leverage.
Private Credit and Banking System
- Private credit investments often originate from reallocations within the banking system, not new money.
- These funds operate within the banking system, relying on bank accounts for transactions.
Leverage in Private Credit
- Private credit funds are increasingly using leverage, mirroring traditional banking practices.
- The scarcity of equity limits the growth of private credit relative to the broader economy.