Shedding Light on Private Credit

In the old days, there weren’t very many places you could get a loan. If a bank wasn’t willing to extend credit, you’d be thrust into the murky world of payday lenders and pawn shops. If you were really desperate, you get funds from a “shark,” who charged you 5%...per week.

Today, nonbank lending is much more respectable. Known as private credit, this sector of finance is growing very quickly. To its adherents, private credit is a channel that gets capital to borrowers more efficiently and one that offers attractive returns to investors. To its detractors, it is a potential source of systemic risk that needs to be better monitored and controlled.

Following is some background on how private credit came to its current standing, and where it might progress from here.

Bank lending has been losing its dominance for several decades. In the United States, very high interest rates in the 1970s led depositors to shift into investment products, limiting the ability of banks to make loans. Scores of bank failures in the 1980s prompted heightened regulation for traditional intermediaries, raising costs for borrowers. These developments created fertile ground for the growth of new credit channels.