Private Credit, Balance Sheets and Financial Stability

SSRN Electronic Journal · 2026-01-01

Private Credit, Balance Sheets and Financial Stability

National Bureau of Economic Research · 2026-03-01 · 1 citations

We document new evidence on the capitalization, funding structure, and performance of private credit funds using comprehensive fund-and asset-level data covering most of the industry.Private credit funds are highly capitalized, with equity typically accounting for 65-80% of total assetsmore than six times the capitalization of U.S. banks, where equity represents about 10%.Debt usage is moderate and largely reflects bank credit lines used for liquidity management.Fund lives average 10-12 years, while underlying loan maturities are generally shorter, implying little or no maturity mismatch-unlike banks, which fund long-term assets with short-term callable deposits.Private credit portfolios are diversified across industries, geographies, and credit strategies, reducing exposure to correlated shocks.Performance data show positive average net annualized returns with limited downside risk to creditors, as losses are largely borne by equity investors.Overall, private credit funds appear conservatively structured and unlikely to pose systemic risks comparable to traditional banks under their current balance-sheet configurations.We conclude by discussing potential vulnerabilities that could emerge as the sector grows, including governance and disclosure frictions, stress-period dynamics, bank-nonbank linkages, and the transmission of losses through limited partner balance sheets and retail investment vehicles.

Monetary Tightening, Commercial Real Estate Distress, and US Bank Fragility

Journal of Political Economy Macroeconomics · 2025-08-19 · 1 citations

The Columbia-CompStak Quality-Adjusted Commercial Real Estate Rent Index

SSRN Electronic Journal · 2025-01-01

Book Value Risk Management of Banks: Limited Hedging, HTM Accounting, and Rising Interest Rates

National Bureau of Economic Research · 2024-03-01 · 8 citations

In the face of rising interest rates in 2022, banks mitigated interest rate exposure of the accounting value of their assets but left the vast majority of their long-duration assets exposed to interest rate risk. Data from call reports and SEC filings shows that only 6% of U.S. banking assets used derivatives to hedge their interest rate risk, and even heavy users of derivatives left most assets unhedged. The banks most vulnerable to asset declines and solvency runs decreased existing hedges, focusing on short-term gains but risking further losses if rates rose. Instead of hedging the market value risk of bank asset declines, banks used accounting reclassification to diminish the impact of interest rate increases on book capital. Banks reclassified $1 trillion in securities as held-to-maturity (HTM) which insulated these assets book values from interest rate fluctuations. More vulnerable banks were more likely to reclassify. Extending Jiang et al.’s (2023) solvency bank run model, we show that capital regulation could address run risk by encouraging capital raising, but its effectiveness depends on the regulatory capital definitions and can by eroded by the use of HTM accounting. Including deposit franchise value in regulatory capital calculations without considering run risk could weaken capital regulation’s ability to prevent runs. Our findings have implications for regulatory capital accounting and risk management practices in the banking sector.

The Secular Decline of Bank Balance Sheet Lending

SSRN Electronic Journal · 2024-01-01 · 2 citations

Book Value Risk Management of Banks: Limited Hedging, Htm Accounting, and Rising Interest Rates

SSRN Electronic Journal · 2024-01-01 · 1 citations

NAR Settlement, House Prices, and Consumer Welfare

National Bureau of Economic Research · 2024-08-01 · 4 citations

Motivated by the recent National Association of Realtors (NAR) settlement, we examine how reduced real estate agent commissions affect home prices, housing turnover, and consumer welfare.Using a calibrated dynamic structural search model, we show that by reducing future transaction costs, lower commissions raise the value of housing as a durable asset and tend to increase house prices.While reduced fees generally improve consumer welfare, most gains accrue to current homeowners, with limited benefits for prospective buyers.Higher prices may also crowd out financially constrained households, suggesting that lower agent fees are unlikely to significantly improve housing affordability and access.Our findings underscore the importance of accounting for market dynamics, consumer heterogeneity, and general equilibrium effects.They also shed light on the redistributive implications of technological innovations-such as those leveraging AI-that reduce transaction costs.Finally, our analysis suggests that static IO-style models may be ill-suited to studying transaction costs in durable goods markets, where dynamic considerations and repeated resale are central, as this can lead to misestimated magnitudes and even incorrect signs of key effects.

The Secular Decline of Bank Balance Sheet Lending

National Bureau of Economic Research · 2024-02-01 · 31 citations

The traditional model of bank-led financial intermediation, where banks issue demandable deposits to savers and make informationally sensitive loans to borrowers, has seen a dramatic decline since 1970s.Instead, private credit is increasingly intermediated through arms-length transactions, such as securitization.This paper documents these trends, explores their causes, and discusses their implications for the financial system and regulation.We document that the balance sheet share of overall private lending has declined from 60% in 1970 to 35% in 2023, while the deposit share of savings has declined from 22% to 13%.Additionally, the share of loans as a percentage of bank assets has fallen from 70%to 55%.We develop a structural model to explore whether technological improvements in securitization, shifts in saver preferences away from deposits, and changes in implicit subsidies and costs of bank activities can explain these shifts.Declines in securitization cost account for changes in aggregate lending quantities.Savers, rather than borrowers, are the main drivers of bank balance sheet size.Implicit banks' costs and subsidies explain shifting bank balance sheet composition.Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation.We conclude by examining how these shifts impact the financial sector's sensitivity to macroprudential regulation.While raising capital requirements or liquidity requirements decreases lending in both early (1960s) and recent (2020's) scenarios, the effect is less pronounced in the later period due to the reduced role of bank balance sheets in credit intermediation.The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending.Overall, we find that the intermediation sector has undergone significant transformation, with implications for macroprudential policy and financial regulation.

NAR Settlement, House Prices, and Consumer Welfare

SSRN Electronic Journal · 2024-01-01