Shadow Banking Solves Bank Instability

Traditional banking faces a fundamental flaw: funding long-term loans with short-term deposits creates inherent instability. Private credit has emerged not as a threat, but as a structural solution by moving credit risk to investors prepared to bear it.

This shift allows banks to become safer, acting as utilities focused on originating and distributing loans. Meanwhile, private credit funds underwrite illiquid assets, managing them through economic cycles and absorbing losses.

This reallocation benefits the real economy by ensuring capital flow without reintroducing the fragility that regulation aims to suppress. Banks increasingly partner with private credit funds, providing senior capital. This structure is more stable than direct deposit funding of illiquid credit, with private credit typically employing significantly lower leverage.

While private credit is subject to market tests and potential losses, risk is ultimately placed with capital designed to absorb it. This enables banks to operate under tighter regulation while continuing to supply vital capital to the economy, resulting in better-placed risk.