Shadow Banking’s Global Risks and Liquidity Concerns Loom Amid Market Turmoil

The carnage in global stock and bond markets wrought by the trade war being waged between the United States and just about everybody else continues.

The latest troubling signs, as of Wednesday morning (April 9) include the fact that investors are walking away from government debt, pushing Treasury yields higher. Central banks are under pressure to cut interest rates. The volatility in bonds, as reports from the financial press indicate that selling here is being used to cover/offset losses in equities begs the question about how risk is being priced, and liquidity is being affected, in other corners of finance.

That includes the relatively opaque sector known as shadow banking, which includes private credit. Shadow banking, broadly defined, includes nonbank lenders and products spanning hedge funds, money market and private equity vehicles, and even government-sponsored entities.

Banks have been getting into private credit, too, as they lend to private credit companies or directly to the nonbank financial firms. The capital then flows through to corporate borrowers.

The logic follows that a shock to those borrowers (say, from tariffs, or waning end market demand, or their own financial straits) would lead to turbulence in paying the interest on, and paying down the debt that’s been extended to them, which in turn hits the cash flow and liquidity of the nonbanks that have acted as lenders, which leads to deleveraging … and perhaps larger risks to the financial system. Separately, in an interview Wednesday with CNBC, Apollo CEO Marc Rowan said the Fed might step in amid pressure on capital markets.

Warning of Risks

Estimates of just how big the shadow banking sector may be vary widely. But, as calculated by the Financial Stability Board, the nonbank financial intermediation sector was tied to $239 trillion of assets. More narrowly defined, “other financial intermediaries,” which include the funds that are largely unregulated, harbor assets of $68 trillion. A paper accessible here estimates that China’s shadow banking system is about $8 trillion.

As reported by PYMNTS earlier this year, private credit accounted for about $2 trillion in investments globally, and represented about 12% of bank loans to non-financial corporations, as per OECD estimates. As for the banks’ moves into the private credit space, the push comes as a way to offset the share of lending they are losing to the alternative channels.

JPMorgan Chase, for example, has over the last four years deployed over $10 billion across more than 100 private credit transactions, while also working with lending partners to allocate an additional $15 billion in private credit. The banking giant is reportedly eyeing allocating another $50 billion to its private credit efforts. In other examples, Citigroup and Apollo last year launched a $25 billion private credit platform, while Wells Fargo in 2023 joined forces with investment firm Centerbridge Partners to issue loans to middle-market companies.

Dimon’s Cautious on Leverage

In his letter to shareholders released this week, JPMorgan CEO Jamie Dimon said that capital and leverage rules have been discouraging banks from acting as direct intermediaries in the financial markets. Noting some of the risks, he wrote, “So now is a good time to go back and ask basic questions that should have been asked before and, in fact, were required to be asked by legislation: What is the cost/benefit of these rules, and what is the interplay between them? What do you want the expected outcome to be?

“For example, do you want mortgages and leveraged lending outside the banking system? Many of these rules incent capital and even companies to be private as opposed to public. Financial risks have grown dramatically outside of the banking system, where there may not be the same liquidity or transparency. We have created large and sometimes leveraged arbitrage opportunities. Similar products now have completely different rules and requirements,” he wrote.

The nonbank share of leveraged lending now stands at 68%, where loans held by nonbanks are $21.9 trillion, up from $15 trillion just before the Great Recession. There are some indications of pressures already extant before the tariff-induced turmoil took shape. Late last month, Fitch Ratings estimated that the U.S. private credit default rate stood at 5.7% for the trailing 12 months ending in February 2025, up from 5% for the similar metric for January.