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Non-bank US institutions to lead to next global financial crisis?

5 June 2025

This week’s Economist provides a stark warning of a possible credit meltdown caused by a new array of US lenders outside the banking system. Christopher Barrow of Metropolitan Safe Deposits considers the consequences.

One thing is certain. There will be another global financial crisis. What we don’t know is what will trigger it. The 2008 crisis had its genesis in the collapse of the US housing market (subprime mortgages), fuelled by risky & complex financial products (collateralised debt obligations & mortgage-backed securities) and poor regulatory oversight. This led to a global contraction of credit and, in turn, failures of financial institutions (Northern Rock, Bear Stearns and Lehman Brothers).

Many observers today focus on macroeconomic risks such as geopolitical instability, tariff-driven trade tensions, high global debt levels, and concerns for both inflation and economic recession. Potential geopolitical triggers are the usual suspects, such as the Russia-Ukraine conflict, the US-China relationship, and the Israel-Hamas war. Other geopolitical risks that are often cited, many of which are interconnected, include cyber attacks, climate risk, energy security, deglobalisation, protectionism, Russia-NATO relations, and tensions in the Taiwan Strait. Arguably, the most dangerous and sudden flashpoint would be China’s decision to use military force against Taiwan.

Intriguingly, the Economist argues that, whatever the trigger for the next crisis, it may not be the banks that crumble, but a mix of powerful US financial institutions that have emerged to replace much of the traditional bank lending. These huge private-market firms are not known to the ‘average man in the street’. They comprise private equity firms (such as Apollo Global, Blackstone, Carlyle and KKR), alternative asset managers (e.g. BlackRock, Ares Management and Oaktree Capital), hedge funds (such as Citadel LLC and Millennium) and proprietary trading firms (notably Jane Street and Citadel Securities). These businesses have one thing in common. They are all US-owned, non-bank institutions operating in the private credit space.

Private credit refers to where a non-bank lender provides loans to companies, typically to small and medium size enterprises that are non-investment grade. These debt ‘investments’ are illiquid and not actively traded in the conventional debt markets. It has increasingly become the alternative to traditional bank credit. Private credit often provides businesses financing options that banks do not offer. This growing trend has been driven by several factors such as the banks’ reduced risk appetite (since 2008), stricter regulations (for the banking sector), and an increasing demand for more flexible and tailored financing solutions.

Since the last financial crisis, banks have become noticeably more cautious about lending. This has created a gap in the market for private credit providers, which offer customised loan structures, including for early-stage companies with less credit history. It has exploded in size in the past 10 years with substantial capital flowing into the private credit markets. In some cases, private credit loans are large enough to replace bank syndicated lending.

According to the Economist article, three big private-market firms Apollo, Blackstone and KKR have amassed US$2.6 trillion in assets, almost five times as much as a decade ago. It goes on to say that Apollo alone lent $200 billion last year, whereas loans held by large banks increased by just $120 billion.

The point of the Economist’s analysis is that, whilst the new-look financial system in the US is innovative and dynamic, in sharp contrast to European finance that is still dominated by local banks, is it sufficiently resilient? Such a rapid structural change in lending markets, according to the Bank of England’s Andrew Bailey, creates new risks and vulnerabilities that are untested and therefore require “new tools and approaches for assessment, surveillance and intervention”. From past experience, the problem is that new risks and vulnerabilities often become visible during (and not before) periods of crisis.

The 2008 crisis started with a US housing bubble funded by subprime mortgages; was exacerbated by complex financial instruments; then compounded by regulators struggling to keep pace; and led to a collapse of the global credit markets. Familiar? Whatever causes the next systemic financial crisis, we are now dealing with an unrecognised financial system in the US, which would undoubtedly have a ripple effect on the rest of the world. The US banks themselves may be much more resilient (better capitalised) than in 2008, but the question is whether the explosive growth and transformation of the credit markets have simply turned the risk dial towards a group of obscure and less regulated private-market firms.