DOES THIS MEAN BANK DISINTERMEDIATION atrophy.3 Over the years, pressures have mounted on both WAS OVERHYPED? sides of banks’ balance sheet. Funds have become harder to attain – the share of household savings channeled into bank We warned a year ago that banks had “willingly ceded deposits has dropped by half – and more di昀케cult to deploy, ground,” understandably uneasy about the economy, as new instruments and lenders emerged to o昀昀er credit on interest rates, warehousing risk, and increased regulatory terms more tailored to borrowers’ needs. At the end of 2023, 2 scrutiny. Prodigious as private credit’s growth has been, it banks accounted for roughly one-third of the credit owed by still amounts to just one-third of the credit market (Figure 7), the U.S. corporate sector, and that share will almost certainly insu昀케cient in itself to meet M&A 昀椀nance needs or broader shrink in the years ahead (Figure 8, page 8). corporate loan demand. Banks were always coming back at some point because of their central role as conduits to The 昀椀ssure cast in greater relief by private credit’s dominance broader capital markets, and their return has certainly been in 2022-23 was not between banks and loans, but between welcomed by borrowers. banks and their customers. Direct lenders disintermediate banks to an extent not observed in the case of investment The recent shift in market realities serves more as funds that merely purchase loans or come into new a clari昀椀cation rather than refutation of the “bank commitments alongside banks; they not only deprive banks disintermediation” thesis. The traditional banking business of assets and the associated yields, but also the underwriting – taking deposits from savers to extend loans to households fees and client relationships that allow banks to cross-sell and businesses – peaked in the mid-1970s and continues to other services for which much of their income depends. Figure 7. Credit Market Size by Instrument Figure 7. Source: Carlyle Analysis; BAML Credit Market Chartbook, March 2024; “Private Credit: Characteristics and Risks,” Fed Notes, February 2024. There is no guarantee any trends will continue. 2. Thomas, J and M. Jenkins (2023), “New Landscapes, New Eyes,” Carlyle, April 2023. https://www.carlyle.com/sites/default/昀椀les/2023-04/Carlyle-JT-2023-Credit-Whitepaper.pdf 3. FDIC (2019), Quarterly Banking Pro昀椀le, Q3-2019. Pgs 31-50. 7