Banks' endeavor into private lending is shadowed by the unsettling echoes of the 2008 financial crisis
In the ever-evolving financial landscape, UK banks are venturing into the private credit market, a sector that has seen significant growth in recent years. The global private credit market notched $2 trillion in assets under management in 2024 and is expected to grow to $2.8 trillion by 2028, according to industry reports.
Simon Hart, partner and financial services lead at RPC, highlighted the lingering scars of the financial crisis as banks explore this new frontier. He expressed concerns about dilution in loan covenants, which could pose a potential risk for banks.
Major players in the UK banking sector, such as Lloyds, Barclays, and Natwest, have adopted different strategies to enter the private credit market. Lloyds is integrating private lending into its commercial banking decision, Barclays has partnered with AGL Credit Management, and Natwest is utilising its private banking arm Coutts for private credit offerings.
Daniel Spendlove, partner at Signature Litigation, predicted that private credit will remain a priority asset class for major capital providers. However, Michael Barnett, partner at Quillon Law, expressed concerns about the increasing investment in private credit, citing its complexity and under-regulation.
Barnett warned of potential risks if unchecked structured assets in private credit could lead to investors rushing for exits, potentially causing value to crash. He urged regulators to get ahead of the private credit industry with appropriate levels of supervision without choking genuine demand.
Regulators have started to raise the alarm about the growth of private credit funds and their complex structures, citing concerns about transparency and potential amplification of shocks in the financial system. The Bank of England shared these concerns earlier this year, stating that the private credit market is more opaque than vanilla bank lending, which makes it a source of worry for regulators.
The rapid expansion of the private credit market filled a significant funding gap following post-crisis legislation that limited banks' ability to lend to certain unregulated or opaque markets. Notably, the Mansion House Accord designated private credit as one of the key unlisted asset classes to be included in pension giants' 10% target to invest default funds in private markets by 2030.
HSBC injected $4bn into its private credit fund earlier this year as part of a plan to scale the platform to $50bn within five years. UK private credit funds raised £15.2bn in 2024, a 14% increase year on year.
Despite the growth and potential risks, the Bank of England unveiled a major shakeup of financial crisis high banking rules in July, indicating a shift in the regulatory environment for the banking sector. The Prime Minister also pledged to unleash the "animal spirits" of the City, encouraging business-facing regulators to place more emphasis on growth and investment.
However, the International Monetary Fund (IMF) warned of potential systemic risks in the global private credit market last year, adding another layer of complexity to the ongoing discussion. As the private credit market continues to evolve, it remains to be seen how regulators will navigate these challenges while fostering growth and investment.
