Core Viewpoint - The $3 trillion shadow banking industry is exhibiting "bubble-like characteristics" that could potentially lead to a global financial shock, according to Fitch Ratings [1]. Group 1: Market Concerns - The recent $12 billion collapse of First Brands and warnings from two regional US banks about bad loans have raised concerns about underlying issues in the private credit market [2]. - The private credit market has grown by 50% in recent years, with the IMF estimating that banks globally have approximately $4.5 trillion in exposure to private credit players [3]. Group 2: Risk Factors - Fitch notes that private credit is transitioning from a niche product to a significant asset class, increasing in both scale and complexity, which could expose the financial system to unexpected risks [4][5]. - The involvement of individual investors alongside major banks and fund managers, along with increased leverage among borrowers, are contributing to the bubble-like trends [5]. - "Spread compression," where investors accept lower yields on risky investments, may indicate weaker lending standards [6]. Group 3: Current Market Dynamics - Despite the emerging risks, Fitch has not observed "classic bubble signs," as investors are still cautious in pricing high-risk credit [7]. - Banks' exposure to risky borrowers is primarily indirect, and they possess limited liquidity risk, allowing them to withdraw funds from private credit vehicles if necessary [7]. Group 4: Economic Outlook - Signs of an economic slowdown in the US could lead to increased defaults among heavily indebted borrowers, particularly in sectors like auto parts and used cars [8].