00:00Well, happy ATS. Jimenez is Professor of Economics at the IESE Business School.
00:05Great to have you on Global Business Europe.
00:07Look, private credit's been booming in the shadows.
00:10Are we looking at early warning signs of the next financial shock?
00:14I don't think so, because, you know, private credit is private.
00:19So that means there's no risk of bank runs.
00:22It does not involve institutions.
00:23In 2008, the off-balance vehicles, they were owned by banks or investment banks or general purpose banks.
00:31But now this is private credit between two private entities.
00:36And if those credit lines become delinquents, if there are losses, then one of them loses,
00:44the other one does not pay, and they'll have to sort it out in court.
00:47And so I don't, you know, so, of course, unless these credits are used as collateral for something else
00:54and they start getting deeper and deeper into the financial system,
00:58this is, you know, banks and the financial system in general are not threatened,
01:03even if there is a major collapse of major defaults on all these credit lines,
01:09which, again, I think is pretty unlikely.
01:12To me, it sounds...
01:14Go ahead.
01:14Well, the FSB and the governor of the Bank of England is saying,
01:17look, you know, risks are building outside the banking system, just like we saw in 2008.
01:23I mean, is history repeating itself?
01:25No, no, I don't think so.
01:27I mean, I think this is the banks screaming, you know, crying wolf because they see their competition.
01:33I mean, this is clearly, you know, these are private arrangements.
01:37They are outside the banking system.
01:39Banks are not getting any cuts in these deals, and they are complaining, you know.
01:44Well, why would it affect the banking system if they don't have a part of it?
01:50For me, it's really hard to understand, you know.
01:54This private credit, private equity, is just an asset on one person's or company's balance sheet
02:05and a liability on another.
02:06There's no banks are involved.
02:09So I don't see...
02:10I really find it hard to see the problem.
02:13But what about HSBC having that write-down of £400 million earlier in the week,
02:19linking it to all of this?
02:21Are you not a tiny bit cautious that if private credit runs into trouble,
02:28that it could turn into a wider financial problem?
02:32You know, what levers are there, what protections are there to stop that happening?
02:36No, there are none.
02:38Clearly there are no protections, but clearly there are no protections.
02:42This is just private.
02:43These are private contracts, private loan contracts between individuals.
02:48So there are no protections.
02:50One of them, if that contract is not honoured, will take a major loss,
02:56and that's that, and that person or that entity might go bankrupt.
03:01But it will not...
03:03It doesn't have any effect on the banking system, on any financial law,
03:08or any regulated institution, because they are out of this loop.
03:13They are not part of this deal.
03:15So, yeah, I mean, somebody might lose and they'll go bankrupt.
03:20But it's a private affair, so what I don't see is the contagion effect
03:26and the implications for the banking, for the regulated,
03:31for the formal banking system at all.
03:34I mean, this is just a private credit.
03:37Okay, in which case, do you see opportunity?
03:40I mean, from a global perspective then, including China,
03:43China, is private credit a vital source of growth?
03:48Or is there a risk that it's growing faster than the rules around it?
03:51Well, you know, look, anytime anybody makes a loan,
03:55there is an extra risk that was not there,
03:57because there's the risk of default.
03:58So if nobody lent to anyone, there won't be any credit default risk.
04:04So there is a risk.
04:05The question is, who is carrying this risk?
04:08And in this case, this is not 2008.
04:11In 2008, the off-balance vehicles were created by banks,
04:16and they were owned by banks, investment banks mostly, okay?
04:20But this is not the case.
04:21This is just private credit.
04:23And basically, the reason why private credit has grown so much
04:27is because banks are, you know, not doing their job.
04:31I mean, it's too expensive, you know?
04:34Basically, their overheads are too large,
04:38and now people find this opportunity of doing without the intermediary.
04:42So to me, this is an intermediary complaining
04:45because it's getting out of business.
04:48I mean, it's losing some business to private, you know,
04:52because private credit is peer-to-peer, you know?
04:54There's no intermediary.
04:55And the intermediary is saying, hey, be careful.
04:58Be careful.
04:59Why?
04:59I mean, that credit risk, that default risk,
05:03is incorporated in the contract,
05:05and whoever is making the loan understands
05:07that there will be some risk of default, no?
05:11So you're saying, don't panic.
05:13Gavio Diaz-Gimenez, thank you very much.
05:15Yeah, don't panic.
05:16I like that.
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