California Banking Perspectives, Sacramento Business Journal

By Kevin Gould – President & CEO, California Bankers Association

Private credit’s growing shadow requires greater transparency and regulatory scrutiny

There is a pattern that repeats itself in financial history. Risk migrates to where regulation is lightest. When lending activity moves outside the traditional banking system, policymakers and regulators should pay close attention. Today, the rapid growth of private credit deserves that attention.

Private credit has become one of the fastest-growing segments of the financial market. This includes direct lending by private equity-affiliated funds, business development companies, and asset managers that have moved aggressively into a space traditionally occupied by banks. Advocates highlight the flexibility, speed, and customized structures that these lenders can offer.

However, private credit is also an example of what many have long described as “shadow banking,” which refers to credit intermediation occurring outside the traditional banking system and largely beyond the regulatory framework governing banks.

That distinction matters.

Unlike banks, private credit lenders are not subject to the same disclosure requirements, capital standards, or supervisory oversight. They are not reporting to regulators on the same schedule or with the same transparency as banks. Investors in these funds receive periodic updates. But policymakers and the public do not have clear visibility into the risks accumulating, underwriting quality, or stress tolerance of this lending market.

This opacity creates challenges, especially when economic conditions start to decline.

One area deserving particular attention is the technology sector. Over the past decade, technology companies have attracted enormous amounts of capital and have become increasingly important drivers of economic growth, employment, productivity, and innovation. Yet many technology firms operate with business models that depend heavily on future growth expectations, recurring capital raises, or valuations that can fluctuate dramatically when market conditions change.

In recent years, private credit providers have increasingly become a source of financing for portions of the technology ecosystem. In some cases, these loans may be secured by assets that are difficult to value or monetize during periods of stress. In others, repayment assumptions may rely on growth trajectories that become challenging to sustain during economic slowdowns.

Our association does not raise concerns lightly. But part of our responsibility is to get ahead of issues before they become crises. The concern is not that private credit exists. Competition in lending can serve borrowers well. The concern is the combination of size, concentration, and opacity that now defines this market.

The rapid growth, lack of transparency, and high exposure to sectors prone to sudden valuation shifts should lead to careful discussions among policymakers and regulators. Financial crises rarely emerge from the risks everyone can see. They often originate in areas where information is incomplete, oversight is fragmented, and market participants assume someone else is monitoring the problem.

We have seen this pattern before.

Before the 2008 financial crisis, significant risks accumulated outside traditional banking channels. Complex financial structures, a lack of transparency, and interconnected markets contributed to vulnerabilities that were not fully recognized until stress occurred. Although today’s private credit market is quite different from the structures that existed at that time, the lesson remains that the lack of transparency can mask risk.

The purpose of raising these concerns is not to discourage innovation or restrict capital formation. Rather, it is to encourage greater transparency and better information. Policymakers make better decisions when emerging risks can be evaluated objectively rather than retroactively.

There is another important reason this conversation matters.

When economic disruptions happen, people often focus on banks. Regardless of the source of the issue, the banking industry is frequently painted with a broad brush. However, today’s banks operate under strict supervision, undergo stress tests, meet capital requirements, and adhere to transparency obligations. At the same time, a growing share of credit creation is occurring outside this regulated framework.

If policymakers are serious about identifying emerging risks before they become crises, scrutiny should extend beyond the traditional banking sector. Focusing exclusively on regulated institutions while overlooking significant activity in less transparent markets creates an incomplete picture of financial stability.

We are not calling for the elimination of private credit. We are calling for a serious policy conversation about whether a market of this size, lending into sectors with this level of complexity, should continue to operate with such opacity. At a minimum, policymakers and regulators should ask what they do not know and why.

That conversation should begin now, while conditions remain favorable, rather than later when answers become far more difficult to find.