How Banks and Private Credit Became the Best of Frenemies

Huw van Steenis (0:03)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:20)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:24)

And I'm Joe Weisenthal.

Tracy Alloway (0:25)

Joe, I feel like I start every private credit episode with the same point. But I mean, private credit, it's everywhere right now. I think I counted like dozens and dozens of stories on private credit that came out just on the Bloomberg in the past week.

Joe Weisenthal (0:41)

There's two funny things that are going on, which is one, private credit. So these non-bank entities providing loans, et cetera, wanting to get into credit, and there's more and more about that every day. And then there's banks wanting to get more and more into private credit, which is this own thing of, okay, you're still at the bank, but you're doing it in some sort of balance sheet structure that resembles private credit. And what's up with that?

Tracy Alloway (1:05)

What's up with that? Indeed. This is the What's Up With That episode. I'm so glad you asked that question, but we're going to be talking about the relationship between banks and private credit, because the other thing that's been happening is every time we talk to a bank or a private credit entity on this show and we ask about the relationship between regulated banks and non-banks, you get this really diplomatic kind of awkward answer. Like, well, we view our bank partners as opportunities, and no one will really explain how they actually feel about each other.

Joe Weisenthal (1:36)

Totally. You know, the one other thing before we get into it that I think about a lot is I look at the rise of private credit, and there is a big part of me that says, this is what regulatory success looks like. This is what post Dodd-Frank success looks like, that there is more of this risk-taking activity happening outside of the deposit-taking banking institution. On the other hand, if a lot of the leverage for private credit and a lot of these relationships is being plied by banks and so forth, then it makes me wonder, did we actually extricate the risk? Or in the end...

Tracy Alloway (2:13)

We just put a wrapper on it.

Joe Weisenthal (2:14)

We put a wrapper on it. In the end, does all financial risk read down back to the banking system?

Tracy Alloway (2:19)

That's exactly it. And I got to say, there is a lot of discourse from which we can pull from, a lot of historical analogies, because of course, bank disintermediation is not a new thing. It's basically been happening for as long as we've had banks. And if I think back to like two big moments in the process of bank disintermediation, it has to be the invention of the junk bond market in the 1980s, securitization also in the 1980s and 1990s, peer-to-peer lending. That was a fun one. Remember that?

Joe Weisenthal (2:49)

Well, the other thing, too, you know, it just occurred to me, and Bear Stearns was not a retail deposit-taking institution. But part of why they blew up is like they had these in-house hedge funds, right? And so even this idea of hedge funds and non-bank entities sort of existing within more larger traditional regulated financial institutions is not that new. That was the story of the great financial crisis.

Tracy Alloway (3:11)

That's exactly right. So I'm very happy to say this is our our banks and private credit basically frenemies episode. We're going to be speaking with really the perfect guest. It's someone I've known for a long time, and we've actually had him on the podcast before, but I don't think you were there. I promise you are really going to love this. We're going to be speaking with Huw van Steenis. He is the vice chair at Oliver Wyman and also the former global head of banking research over at Morgan Stanley. That's where I got to know him during the depths of the Eurozone financial crisis when I was on FT Alphaville. He's also formerly an advisor to Mark Carney at the BOE. I think he won a series of research awards at various points in his career, but really one of the smartest guys I know when it comes to banks and financials. So Huw, thank you so much for coming on Odd Lots.

Huw van Steenis (4:00)

Well, Tracy, thanks so much for having me on.

Tracy Alloway (4:01)

We are very excited. First of all, maybe let's just start with the basic question, because everyone seems to have different opinions, different numbers around this. But how big is private credit at the moment compared to the traditional banking system?