The migration of credit risk: out of the banks, out of sight

Here is the great paradox of post-2008 finance. Fifteen years were spent making banks safer: more capital, stress tests, greater transparency. And it worked, banks today absorb shocks that would have carried them off yesterday. Yet credit risk itself has not shrunk. It has moved. It has left the most closely watched compartment of the financial system to settle where the regulator sees less, in private-credit funds, insurers, securitisation vehicles. Non-bank finance now weighs more than half of the world’s financial assets. This piece synthesises that migration, traces where the risk has lodged and how it hides there, shows that it comes back to the banks through a back door, and weighs the question that divides the regulators themselves: has the system become safer, or merely less legible?

The great shift

Let us start with the measure of the phenomenon, because it is spectacular. Non-bank finance, the non-bank financial intermediation (NBFI) that the Financial Stability Board tracks, has grown from about $67 trillion of assets in 2004 to some $238 trillion in 2023. It now represents more than half of global financial assets, around $257 trillion. The centre of gravity of financing the economy has tipped outside the banks.

This shift is no accident, it is a direct and largely intended consequence of the response to the 2008 crisis. By imposing heavier capital requirements on banks for risky credit, regulation made that credit less profitable for them to hold. The market did what it always does against a constraint: it went around it. This is regulatory arbitrage, the shift of activity toward the least-regulated compartment. Corporate credit migrated to private credit funds, mortgage credit to non-bank lenders, all off the bank balance sheet and beyond the supervisor’s watch. The risk was not removed, it was relocated.

The hiding places of risk

Where, exactly, has the risk lodged, and how does it make itself less visible there? The answer maps our recent coverage, because each compartment has its technique of opacity. In private credit, the value of loans is not quoted but model-estimated, which lets the same asset carry two prices depending on who holds it, the subject of our piece on private credit and its two prices. In leveraged credit and CLOs, negotiated restructurings push out default without recording it, making the default rate look lower than it is. In commercial real estate, extend-and-pretend prolongs troubled loans to avoid booking the loss.

The common thread of these techniques is not fraud, it is reduced visibility. A loss not materialised, a value one estimates oneself, a maturity one pushes out: in each case the risk exists but does not show up in the public figures. Add a discreet and massive actor, the life insurer, often owned by a private-equity firm, which has loaded its balance sheet with private credit and illiquid securitisation tranches. Credit risk has not only moved; it has dissolved into structures designed, knowingly or not, to be poorly measured.

The return through the back door

Here is where the story of risk “leaving the banks” cracks, and it is the most important point. Banks have not left credit, they have changed roles. Rather than lending directly to the risky firm, they lend to the private-credit fund that in turn lends to the firm. They finance the non-banks through credit lines, portfolio-backed loans, warehouse facilities. The private-credit regulator says it plainly: banks remain at the core of non-bank finance, structuring and financing a large part of it.

One analyst has named this move the “Great Retranching”: the bank has moved up the capital structure, from direct lender to senior creditor of the non-banks, but credit risk has not left the banking system, it has been transformed. The apparent disintermediation is partly a disguised re-intermediation. That is why reading bank results now requires hunting down their exposure to non-bank actors, as we stressed in our second-quarter bank-earnings preview.

The reassuring thesis: patient capital

We must now give full force to the opposite reading, because it is defended by serious authorities and is nothing absurd. In it, this migration has made the system safer, not more dangerous. The central argument is patient capital. A private-credit fund finances its loans with money locked up for years, from pension funds and insurers, not with deposits repayable on demand. It therefore cannot suffer a run like a bank, nor be forced to dump its assets overnight. In case of loss, it strikes long-term investors who accepted it, not the payment system nor the taxpayer.

This reading has the support of the regulators themselves. The chair of the SEC judged in 2026 that private credit “is not a systemic risk”, and the head of the IMF’s capital-markets division that this risk “is certainly contained”. Academic work goes the same way: one study estimates that a shock adding $36 billion to banks’ private-credit exposure would give up only about two basis points of their hard capital ratio, a trifle. And the most awkward argument for the alarmists remains that the 2023 panic hit regional banks, that is, the most regulated place in the system, not private credit. To regulate is not to make safe, and shifting risk toward patient capital could well be progress.

Why the migration still worries

The antithesis is solid, but it has flaws the analysis cannot ignore. The first is the re-coupling just described: if banks finance the non-banks, risk is not walled off, it circulates between the two worlds through the wholesale-funding channel. The IMF said it explicitly, a stress in the non-bank sector can propagate to the banks, and contagion would hit leveraged credit, regional banks, insurers and pension funds simultaneously. The second flaw is hidden leverage, stacked on several floors, that of the fund, that of its assets, that of the insurer that holds them, and that no aggregate statistic captures well.

The third flaw is the deepest, and it is the heart of the l0g thesis: opacity is itself a risk. You cannot manage what you do not measure, and private credit is valued on models, not on market prices. “What we still don’t know about private credit is troubling”, sums up a headline in the trade press. Add that this market has never lived through a real default cycle: it grew during fifteen years of easy money, and its promise of resilience remains an untested hypothesis. Finally, the border of patient capital blurs with the rise of semi-liquid vehicles sold to the retail public, which reintroduce run risk where it was sworn there was none, as the gating episode at a semi-liquid private-credit fund showed. The Financial Stability Board was not fooled, publishing in 2026 a report dedicated to the vulnerabilities of private credit.

The real stake: seeing

Our reading, measured, does not choose between the two theses, because the data to do so does not yet exist. It points instead to the problem that transcends them. The risk most surely created by this migration is neither an excess of leverage nor a wave of imminent defaults, two things that will be debated for a long time. It is the loss of legibility. Regulation optimised itself for the last crisis, the banks’, with its ratios and its stress tests, while risk settled where data is scarce, late and estimated. The supervisor fights the last war, weapon in hand, in an empty room, while the game is played in the next room, without light.

Yet illegibility is in itself a form of risk, regardless of whether the system is objectively more fragile. A system you cannot measure is a system whose true fragility you will discover at the worst moment, when a shock forces the figures out. It is the same lesson as that of pre-2008 shadow banking: the danger was not only in the subprimes, it was in the fact that no one knew who held them. Finance has moved credit risk from a place it watched to a place it barely looks at. Whether that is safer or not stays open; that it is less visible does not.

In sum

Credit risk has not vanished from the financial system, it has changed address, and its new address is less well lit than the old. Regulators assure it is better placed, in patient hands that can carry it; the facts of re-coupling, stacked leverage and valuation opacity invite us not to take them at their word. Both camps are right about part of reality, and neither can prove its thesis until a real default cycle has occurred. What must be followed, then, is not a single number but a set of signals: banks’ exposure to the non-banks, the truth of valuations when it filters through, the behaviour of semi-liquid vehicles under strain, and the first big default that will force everyone to look. Risk has left the light. The analyst’s job is to keep following it in the shadow.

Sources

1. Financial Stability Board, “Global Monitoring Report on Non-Bank Financial Intermediation 2025”: NBFI from $67trn (2004) to $238trn (2023), more than half of global financial assets: https://www.fsb.org/uploads/P161225.pdf
2. Finance Watch, “Shadow banking no more? Banks are at the core of Non-bank financial intermediation”: the central role of banks in funding the non-bank sector: https://www.finance-watch.org/press/shadow-banking-no-more-banks-are-at-the-core-of-non-bank-financial-intermediation-nbfi/
3. Financial Stability Board, “Report on Vulnerabilities in Private Credit”, 6 May 2026: https://www.fsb.org/uploads/P060526.pdf
4. American Investment Council, “Regulators Affirm Private Credit Does Not Pose Systemic Risk”: statements by Paul Atkins (SEC) and Tobias Adrian (IMF): https://www.investmentcouncil.org/what-they-are-saying-regulators-affirm-private-credit-does-not-pose-systemic-risk/
5. Perspective on Risk, “Private Credit” (April 2026): the “Great Retranching” and the transformation of risk into senior exposure to the non-banks: https://perspectiveonrisk.substack.com/p/perspective-on-risk-april-11-2026
6. Wealth Management, “What we still don’t know about private credit is troubling”: the opacity and the first test of private credit: https://www.wealthmanagement.com/alternative-investments/what-we-still-don-t-know-about-private-credit-is-troubling
7. l0g, Private credit, one asset two prices, The silent contagion of private credit and the guide CLOs and leveraged loans.