As traditional banks retreat from risky commercial property loans, private credit investors are filling the void. These new players, with higher risk tolerance and longer investment horizons, are expected to absorb a trillion dollars in commercial mortgages, reshaping the sector's financing.

Large banks have offloaded riskier loans to private credit, which is now more accessible to retail investors. According to Crossmark's Victoria Fernandez, this concentration of risk in a less transparent market, where "cockroaches" may be hiding, is a primary systemic concern.

The removal of leverage lending guidelines will not cause a simple shift from private credit back to banks. Instead, it will accelerate the convergence of public and private credit markets. Banks will now compete across the entire financing continuum, further blurring the distinctions in terms and cost between the two.

Scott Goodwin highlights that while major banks report stable consumer credit, they overlook the explosive growth of online lenders like Upstart and SoFi. This hidden leverage, often ending up on insurance company balance sheets, means the US consumer is far more indebted than traditional metrics suggest.

According to PIMCO's CIO, post-crisis regulation heavily targets the last failure point (e.g., banks and consumer lending post-GFC). This makes previously regulated sectors safer while risk migrates to areas that escaped scrutiny, like today's non-financial corporate credit market.

Despite headlines blaming private credit for failures like First Brands, the vast majority (over 95%) of the exposure lies with banks and in the liquid credit markets. This narrative overlooks the structural advantages and deeper diligence inherent in private deals.

The greatest systemic threat from the booming private credit market isn't excessive leverage but its heavy concentration in technology companies. A significant drop in tech enterprise value multiples could trigger a widespread event, as tech constitutes roughly half of private credit portfolios.

Regulatory leverage lending guidelines, which capped bank participation in highly leveraged deals at six times leverage, created a market void. This constraint directly spurred the growth of the private credit industry, which stepped in to provide capital for transactions that banks could no longer underwrite.

While the Dodd-Frank Act successfully bolstered regulated banks, it pushed systemic risk into less visible parts of the financial system like crypto. The challenge has transformed from managing institutions that are 'too big to fail' to identifying risks in areas that are 'too small to see' and outside the regulatory perimeter.