Love the Bagehot quote! More importantly, this is a fantastic description of credit chains and interactions among the banking sector and a set of increasingly important NBFI's. Well done!
Glad you wrote this. I've been meaning to write on Private Credit for a while and now I don't have too!
First observation would be that this seems like a natural development as more of "deposit" money is now uninsured. No real difference from bond market funding.
Second, I like Wigglesworth conclusion:
… private credit is too small and too little leveraged to cause major wider problems. When problems do arise, locked-up capital means that the pain is more contained. And if an investor does need to ditch a big private credit fund exposure, they can do so at a discount to another big institution.
Third, the place to watch is pretty much the same risks that hit the mortgage market during the GFC: "liquidity lines" from banks that are really credit guarantees, and additional leverage being added through derivatives. Market is still young, so hopefully not much of this yet.
Finally, Bloomberg had a nice piece on the link to insurers. Insurers are increasingly investors in this "private credit" space and are doing so through the Apollos, etc. Insurance accounting and capital rules (in the US) is a bit more forgiving than bank accounting and capital rules. This probably means a slower ultimate realization of any losses, less of a firesale externality risk.
I understand your arguments, but the analysis it's too static. There is just a brief mention of a dynamic state change e.g. the run on SVB where it from solvent to insolvent in few days, which is a pretty short time constant. Static analyses serve a purpose, but are insufficient to understand stability. Model the "money" flows via double entry bookkeeping's assets + liabilities = equity relationship. Professor Steve Keens free Minsky modeling software is the ideal simulator for economic modeling. It's downloadable from Sourceforge and you'll find videos on Youtube explaining the software and modeling various fundamental dynamic aspects of the economy.
Love the Bagehot quote! More importantly, this is a fantastic description of credit chains and interactions among the banking sector and a set of increasingly important NBFI's. Well done!
Glad you wrote this. I've been meaning to write on Private Credit for a while and now I don't have too!
First observation would be that this seems like a natural development as more of "deposit" money is now uninsured. No real difference from bond market funding.
Second, I like Wigglesworth conclusion:
… private credit is too small and too little leveraged to cause major wider problems. When problems do arise, locked-up capital means that the pain is more contained. And if an investor does need to ditch a big private credit fund exposure, they can do so at a discount to another big institution.
Third, the place to watch is pretty much the same risks that hit the mortgage market during the GFC: "liquidity lines" from banks that are really credit guarantees, and additional leverage being added through derivatives. Market is still young, so hopefully not much of this yet.
Finally, Bloomberg had a nice piece on the link to insurers. Insurers are increasingly investors in this "private credit" space and are doing so through the Apollos, etc. Insurance accounting and capital rules (in the US) is a bit more forgiving than bank accounting and capital rules. This probably means a slower ultimate realization of any losses, less of a firesale externality risk.
I understand your arguments, but the analysis it's too static. There is just a brief mention of a dynamic state change e.g. the run on SVB where it from solvent to insolvent in few days, which is a pretty short time constant. Static analyses serve a purpose, but are insufficient to understand stability. Model the "money" flows via double entry bookkeeping's assets + liabilities = equity relationship. Professor Steve Keens free Minsky modeling software is the ideal simulator for economic modeling. It's downloadable from Sourceforge and you'll find videos on Youtube explaining the software and modeling various fundamental dynamic aspects of the economy.