Private credit defaults threaten bank balance sheets
The speaker argued that rising US private credit defaults, which hit a record 6% in April, pose a structural threat to major banks that have heavily lent to non-bank financial institutions on a non-recourse basis.
The argument
The guest noted that bank lending to private equity and private credit funds is increasingly subprime, with double-digit loss rates in some portfolios. While bank-level defaults remain low, the exposure to non-recourse non-bank lending means banks will eventually take significant losses when asset prices correct.
The thesis, stress-tested
✓ What validates it
- ✓Fitch reports further increases in the US private credit default rate beyond 6%
- ✓Write-downs or rising provisions for non-recourse loans in upcoming bank earnings
▸ Risks discussed
- ▸Asset price inflation could persist, masking credit risks longer
- ▸Rate cuts could ease refinancing pressure for borrowers
Hear it yourself
"And then, you know, you had this Iran war and a lot of other noise coming out of the political side. And all of a sudden, you know, rates have backed up half a point. The on the run, Fannie, Freddie, Ginny is a five and a half right now, which means that they're writing six and a half percent loans. There's usually about a point difference between the MBS and the loans that they're they're selling in the pools. So, you know, the industry today as we see it is well over six and a half for a thirty year fixed rate mortgage. And what's that gonna mean for them? Well, you're you're gonna still see some loan growth, but it's mostly to, you know, the usual suspects in private credit, private equity."
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