They keep coming and affecting mainstream banking
3 Likes
HSBC is not a âshadow bank.â HSBC is a highly regulated global banking group. It operates in multiple jurisdictions, with key entities supervised by major regulators, including the Office of the Comptroller of the Currency (OCC) and FDIC in the US, and the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) in the UK.
The regulated banking systemâs exposure to âshadow bankingââtechnically referred to by regulators as Non-Depository Financial Institutions (NDFIs) âhas reached historic levels.
As of early 2026, the total exposure consists of two primary components: funded loans (money already out the door) and undrawn commitments (credit lines waiting to be used).
Recent FDIC and Federal Reserve data indicate that the potential exposure of U.S. banks to the shadow banking system has surpassed $4 trillion .
The lending is highly concentrated among a few âGSIBsâ (Global Systemically Important Banks). Thirteen large U.S. banks âincluding JPMorgan Chase, Bank of America, and Citigroupâaccount for approximately 80% of the entire industryâs NDFI loan balances.
If private credit markets experience a liquidity squeeze (as seen in early 2026 software-sector distress), shadow banks may draw down their $2.8 trillion in credit lines all at once, putting sudden liquidity pressure on the traditional banking system.
Itâs a recipe for a run on the banks. The âGSIBsâ are âtoo big to failâ so they would be backstopped by the Fed. Would Fed Chair Warsh would be as open-handed as Bernanke or Powell?
Probably not since enforcing market discipline is the core of Warshâs monetary philosophy.
Warsh would probably rescue the TBTF banks by demanding only Treasurys (strong) as collateral but refusing to accept loans to shadow banks (weak) as collateral. As bank regulator, the Fed can pressure TBTF banks to invoke Material Adverse Change (MAC) clauses which allow banks to cancel a line if the borrowerâs financial condition has deteriorated significantly. That would protect the TBTF bank but the shadow bank investors (equity and bondholders) would take a haircut and possibly collapse.
The âtrail of contagionâ from a major private equity (PE) collapse wouldnât just hit the real economyâit would likely hit it immediately and through multiple channels simultaneously.
Because private equity (PE) firms now control the âbackboneâ of U.S. employmentâthousands of mid-market companies in healthcare, software, and industrialsâthe lag between a financial collapse and a real-world impact has shrunk significantly compared to 2008.
If the private credit firms that finance the PE companies run dry the PE companies wonât be able to make payroll, much less finance expansion.
The âunconventionalâ Fed lending facilities that Bernanke and Powell approved prevented this potential disaster. Private equity used the easy money from the Fed and private capital to buy many real-economy assets.
But Warsh has criticized them. If the Fed doesnât backstop shadow banks and PE a financial crisis and deep recession could result.
Invest 5 minutes in this video that summarizes the situation.
This is the leading edge of a potential financial crisis which could cripple the real economy as well.
Wendy
4 Likes
Yikes yeech ohmygoodnessbuckleupgood!!
thanks for a very informative post that looks more relevant by the day.
So private credit could impact stocks. Government debt could impact Treasuries, and bonds overall. Nowhere to hide?
The most risk-averse portfolio is a ladder of high quality bonds (including CDs and TIPS) held to maturity. TIPS protect from inflation.
A bond fund will lose asset value if interest rates rise (especially likely during a credit crisis). Individual bonds will always return par at maturity even if their value fluctuates with market conditions along the way. Bond funds never mature so itâs possible to lock in losses.
@intercst will be quick to point out that such a portfolio has a low return to go along with its low risk. He has pointed out many times that a drop in the stock market always reboundsâŚeventually.
What to do depends upon an individualâs risk tolerance and need for income and capital gains to support lifestyle.
An older person whose modest lifestyle is covered by low bond returns plus Social Security, wants to preserve capital because the rebound may take more time than life expectancy and hates volatility may choose the low-risk path.
Wendy
3 Likes
I could be wrong, but I donât think the intent was to label HSBC as a shadow bank. HSBC lent money to a âfinancial sponsorâ, who lent money to MFS. MFS was caught using the same assets as collateral for multiple loans. Evidently, thatâs a no-no. HSBC described itâs exposure as âsecondaryâ.
The large financial institutions who are regulated may not be fully aware of their exposure. I wouldnât be surprised if we start seeing tertiary, quaternary, quinary, and senary exposuresâŚoh my!
4 Likes
I know that and think that you misinterpreted my post. HSBC is a major bank that seems to have become rather too involved with a shadow bank and was âtakenâ for a few hundred millions, the same way Barclays were a few posts ago.
There have been several posts about the mainstream banks getting their businesses âmixed upâ with shadow banks. Just wondered how deep this goes.
How many more are we going to get?
Recent FDIC and Federal Reserve data indicate that the potential exposure of U.S. banks to the shadow banking system has surpassed $4 trillion . For scale, U.S, GDP is $32 trillion so the exposure of banks to shadow banking is 1/8 of GDP.
Wendy
2 Likes
Andrew Bailey (BofE) has been warning of the risks about shadow banking for a while:
Writing in the FT, Andrew Bailey, governor of the Bank of England and FSB chair, drew attention to the âsignificant interlinkagesâ of private credit with banks, asset managers, insurers and private equity, adding these âmultiple layers of leverageâ required âdeeper scrutinyâ.
The FSB, which brings together the worldâs leading central bankers, finance ministers and regulators, said it would carry out further work on several areas of private credit, including its connections with other parts of the financial system and potential liquidity mismatches.
1 Like
FSB just put out a new report on the private credit industry, highlighting the AI industry risky business.
"That includes AI companies, which have increasingly turned to private lenders to fund datacentres and other infrastructure. The AI industry accounted for more than a third of private credit deals in 2025, up from 17% over the previous five years. âThis focus on specific sectors may leave private credit funds exposed to idiosyncratic risks ⌠[and] increase exposure to region or industry-specific shocks,â the report said.
On AI loans, the FSB warned that a âsharp correction in asset valuations, which have increased rapidly, could lead to sizeable credit losses to private credit investorsâ.
The FSB said: âThis could be triggered by any significant shortfall in the supply of electricity, a critical factor in the construction and operation of datacentres, which could lead to delays or cancellations of projects.â
Meanwhile, AI company valuations could be hit if investments lead to an oversupply of datacentres, which eventually outpaces demand for AI, leading to lower-than-expected returns for investors."
Link to FSB report -
The private credit ecosystem seems very straightforwardâŚ
The more ways we invent to make money, the more vulnerable we become to losing money.
5 Likes
I am hiding in plain sight in a bank with my cash.
Do not park your cash just anywhere.
I had to go away and refresh myself on what to look for in the reports. You want to know the Total Risk-Based Capital Ratio. It needs to be over 10 and much closer to 20 for safety. You need to look to see that the institution is not holding a lot of treasuries and now other bonds. The neighborhood where the loans are should have a very high equity ratio in the local housing.
2 Likes