‘Shadow banks’ quizzed over meltdown threat from hidden losses

Core Viewpoint - Concerns are rising that the shadow banking sector, particularly the $2 trillion private credit industry, could trigger the next financial crisis due to unrecognized losses and inadequate loan valuation practices [1][2]. Group 1: Regulatory Scrutiny - The Financial Conduct Authority (FCA) is increasing pressure on shadow banks to more accurately assess the value of loans that may not be fully repaid [2][8]. - FCA's discussions highlight worries about the rapid growth of private credit funds, which are projected to reach nearly $4 trillion by 2030 according to Moody's [3]. Group 2: Valuation Practices - Critics accuse shadow banks of using "mark-to-myth" valuations, which tend to reflect unrealized gains while failing to account for deteriorating loans, contrasting with the more transparent "mark-to-market" accounting [5]. - The FCA is focusing on scrutinizing lending practices, particularly for critical sectors like utilities, rather than targeting specific loan types [8]. Group 3: Industry Growth and Risks - The private credit industry has seen significant growth, fueled by investments from Gulf sovereign wealth funds and high demand for loans from data center builders capitalizing on the AI boom [7]. - U.S. domestic banks have lent approximately $1.2 trillion to shadow banks, with an estimated $300 billion of these loans directed towards private credit providers [10].