The Growth of Private Credit in the UK: The 'New' Threat to Financial Stability

The growth of private credit has been a regulatory concern globally since at least 2019, when the IMF Global Financial Stability Report clearly pointed to the dangers associated with increasing levels of private debt and leverage in the financial system, particularly as they were originating in the non-bank financial system. These warning signs were reiterated by the IMF in subsequent years (crucially in 2022; 2023; 2024), with more vigour, and critically pointing to the fragility of the real economy, and the potential inability of economic actors (both in the finance industry and outside of it) to meet payment obligations (both interest and principal) under most debt contracts. This analysis was indeed redolent, and correctly so in my view, of the last stages of a Minskyan instability cycle. 

More recently, in July 2025, the UK Parliament launched an inquiry into the growth of private credit, focusing on UK financial markets, and on the impact that post-2008 legislation had in spurring this phenomenon. This blog post is based on the written evidence that I submitted in response to the above inquiry, which was then cited in the House of Lords’ Report Private markets: Unknown unknowns, in January 2026, and on the article subsequently published in the Butterworths Journal of International Banking and Finance Law. 

I argued that the root cause of this development in financial market lies in the earlier growth of the shadow banking system, in the years before the global financial crisis (GFC) of 2008. This was the result of the progressive morphing of the business of banking, which, facilitated by regulatory changes in the 1980s and 1990s, expanded to capital markets channels of intermediation. In the aftermath of the GFC, this expansion was recognised as one of the main causes of the crisis, specifically with respect to banks’ exposure to the securitisation and the repo markets. As a result, post-2008 regulatory exercises were focused on, and to a large extent succeeded in, limiting banks’ exposures to securitisation and repos. 

These regulatory reactions came, as invariably happens after a crisis, with unintended consequences. First, they increased costs on banks, which importantly further impaired banks’ capacity (and willingness) to engage with core banking activities, such as lending to the real economy. Secondly, they increased opportunities for regulatory arbitrage, because the bulk of post-2008 regulation was directed at banks (Basel III for instance is not directed at the panoply of non-bank entities in capital markets). 

In parallel with these trends, policymakers in the post-crisis years sought to rebrand shadow banking as a more palatable system that could foster economic growth. It was at this point that the wording shifted towards ‘sustainable market-based finance’ and then non-bank financial intermediation (NBFI). It is in this context that the EU project to further harmonise European capital markets, the EU Capital Markets Union, should be seen, with its main emphasis on securitisation and bond markets (see also a wider critique of debt capital markets for an appraisal of their proneness to instability and crises).

The rise of NBFIs did not happen in isolation, and instead it developed over the past ten years through the fostering of mutual dependencies between non-bank intermediaries and large banks. These interlinkages are perhaps less visible than those between banks and the shadow banking sector in the pre-crisis years, but equally problematic. NBFIs for instance benefit from lines of credit from banks, which also perform liquidity management, clearing services, underwriting and insurance of NBFIs’ creditworthiness. This degree of interconnectedness can be seen as an engine of financial instability, because small, seemingly peripheral crises in hidden corners of financial markets can have ripple effects across markets and institutions. This has already happened in recent years, with episodes such as the collapse of Archegos in the US, the LDI crisis in the UK, or the panic of 2020 and the ‘dash for cash’. The more recent collapse of US firm First Brands further exposed the fragilities of a system of financial intermediation centred around private credit. 

This is because private credit providers do not possess the structure, nor the incentives, to monitor the quality and level of private debt that they originate. Moreover, transmission channels between banks and NBFIs can transform peripheral shocks into systemic crises, due to the transmission of credit risk, excessive leverage, and liquidity spirals across market participants. While NBFIs are not in principle recipients of regulatory protections that would normally mitigate the impact of banking crises, liquidity facilities have repeatedly been extended by major central banks (Bank of England, Federal Reserve, ECB) in recent years to prevent a major systemic shock from occurring. This last point reinforces concerns of regulatory arbitrage raised earlier in this piece.

Lastly, the effectiveness of private credit as a source of finance for the real economy remains, at best, dubious. Despite claims that NBFIs can serve small and medium sized enterprises (SMEs), or the real economy more generally, there are convincing arguments pointing to the fragility of this model. The capacity of private credit providers to replace or even complement banks is impaired by their very organisational and institutional structure. Not being licensed as banks, these entities do not benefit from the necessary regulatory backstops—deposit insurance protection and lender of last resort—and remain therefore exposed to liquidity risks. As already stated, these are often transmitted across the financial system, also because of the lower level of supervision that these entities are subject to, relative to banks. Against these concerns, there is strong evidence suggesting that banks are by design better suited to serve the real economy, and SMEs are found to prosper in economies characterised by networks of local, mutual banks.

Read the author’s journal article on private credit. 

Vincenzo Bavoso is Professor of Commercial Law at the University of Manchester.