Shadow banking shakes Wall Street: $1.8 trillion private loans faced run on the banks, $2.5 trillion leverage surge.

Notice that, at the beginning of 2026, Wall Street is facing a deep-seated turmoil caused by the "shadow banking" system. On one hand, the $1.8 trillion private credit industry is deeply embroiled in a "liquidity squeeze"; on the other hand, ratings agency S&P Global warns that the tens of trillions of dollars in leverage being funneled from investment banks to hedge funds are creating new financial stability threats. In this risk storm, major banks such as Bank of America and JPMorgan Chase have initiated a "collective show of hands" regarding their exposure to private credit, while bond market giant PIMCO chooses to go against the tide by buying up assets. Targeted "show of hands": Major banks disclose private credit risk cards Facing extreme market concerns about the detonation of "landmines" in private credit, large Wall Street banks broke their silence this week when reporting earnings, launching a wave of targeted disclosures regarding their financing portfolios in private credit, in an attempt to prove their innocence. Exposure transparency To pacify investor sentiment, major banks have for the first time detailed the scale of financing they provide to private credit companies, which is usually in the form of "warehouse financing": JPMorgan Chase: Disclosed an exposure as high as $50 billion, the highest in the industry. CEO Jamie Dimon stated that the bank will not be impacted unless there are "extremely large losses" in private credit, and he is currently "not particularly worried". Wells Fargo & Company: Disclosed an exposure of approximately $36.2 billion to private credit companies in the first quarter. It is worth noting that Wells Fargo & Company lent a total of $210.2 billion to all non-bank Financial Institutions, Inc., with $8 billion directly allocated to recently pressured BDCs (Business Development Companies). Companies in the business services, software, and healthcare industries account for about half of the collateral value, with software companies making up 17%. For over 98% of transactions, Wells Fargo & Company can adjust the margin if the credit performance of the underlying assets deteriorates. According to an investor report released on Tuesday, the loan portfolio will have approximately 40% buffer space, meaning that 40% of losses will be absorbed by the bank's loan capital before Wells Fargo & Company confirms the loss. Citigroup: Disclosed $22 billion in such loans and emphasized that its financing portfolio has "substantial" equity cushion and structural protection measures, stating that no losses had occurred within the duration of its investment portfolio. Morgan Stanley: Chief Financial Officer Sharon Yeshaya stated that the majority of the loans provided to commercial credit intermediaries are direct loan financing. According to regulatory filings, this figure was $201 billion as of the fourth quarter. Bank of America Corp: Disclosed an exposure of approximately $20 billion. According to the bank's presentation materials, the bank has the right to devalue eligible collateral in the event of credit deterioration. PNC Financial Services Group, Inc.: Disclosed its exposure of $7 billion. Private credit "powder keg": Default and redemption Bank disclosures show that software companies make up about 17% of the collateral. Due to disruptions caused by AI to traditional software models and the impact of high-interest rate environments, the default rate for private credit has risen to 9.2%. This has led to restrictions on redemptions by giants such as Blue Owl, Ares, Apollo, and KKR, causing panic withdrawals by retail investors. Blackstone: Its BCRED fund faced $6.5 billion in redemption requests in Q1, accounting for 7.9% of the fund's size. BlackRock, Inc.: Redemption requests for its $26 billion HPS fund reached 9.3%, far exceeding the quarterly limit and restricting redemptions. This model of promising "retail liquidity" for "non-liquid loans" is facing severe liquidity blockage. S&P deep warning: Hedge fund leverage - the "undercurrent" of the financial system While banks are busy distancing themselves from private credit risks, a deep report from S&P Global has revealed another larger and more hidden risk point: the huge leverage being provided by investment banks through their prime brokerage business to hedge funds and proprietary traders. $25 trillion in leverage hidden S&P pointed out that the loans provided by bank investment brokerage departments to hedge funds exceeded $25 trillion in 2024, doubling in just four years. High concentration: The income from "market financing" for four banks, including BNP Paribas, Barclays, Goldman Sachs Group, Inc., and Morgan Stanley, surged by 25% in 2025 to over $24 billion, accounting for 30% of their total market business revenues. Systemic threat: This scale and concentration mean that the ecosystem has an "inherent vulnerability". Regulatory bodies such as the FSB and the Bank of England are concerned that this could trigger a chain reaction similar to the Archegos collapse in 2021, potentially affecting sovereign bond markets. The ghost of basis trading S&P highlighted the explosive growth of leverage in basis trading in recent years. A few of the largest hedge funds globally are using small price differences between US bond spot and futures markets to engage in massive games facilitated by low margins provided by banks. If banks further lower the threshold to compete, the risks will become immeasurable. In addition, proprietary trading giants like Jane Street and XTX are occupying more and more space on bank balance sheets, with their influence reaching "too big to fail" levels. Game-playing and reversal: PIMCO goes against the flow to reshape credit boundaries In the extreme turmoil caused by S&P's risk warning, major banks' collective disclosures, and giants like Blackstone restricting redemptions, the choice made by PIMCO (Pacific Investment Management Company) holds significant meaning. Going against the grain with Blue Owl At a sensitive time when institutions like Blue Owl Capital are facing redemption pressures and downward valuations, PIMCO made a decisive move. It is reported that PIMCO recently fully acquired $400 million worth of bonds issued by Blue Owl. This action sends a strong signal: while bank leverage is restricted and rating agencies are issuing warnings, top asset management giants are using their own funds to take control of pricing in the credit market. A "no systemic risk" gamble In the face of accusations of systemic risk, Daniel Ivascyn, Chief Investment Officer of PIMCO Group managing over $2 trillion in assets, openly refuted them on Wednesday. Ivascyn stated: "What we see in private credit is not systemic risk, it's disappointment. The returns are lower than expected, but defaults are relatively manageable." He believes that most of the current pressure stems from liquidity and interest rate drivers, rather than a widespread deterioration in asset quality. Ivascyn believes that as the industry faces liquidity challenges, many "forced sellers" will be forced to sell assets later this year, creating excellent opportunities for investors with fresh balance sheets like PIMCO. As mentioned earlier, PIMCO has recently fully purchased all $400 million in bonds issued by Blue Owl Capital's private credit fund, injecting liquidity into the industry through actions. Ivascyn revealed that current market trends allow them to obtain more favorable investor protection clauses at a lower price. Who is panicking, who is harvesting? Current Wall Street is in a dangerous and delicate balance: private credit is "squeezing water," major banks are proving their innocence by disclosing exposures, and S&P is warning of the $25 trillion hedge fund leverage on investment bank balance sheets. However, as Ivascyn said, as "forced sellers" increase later this year, this liquidity storm may eventually evolve into a power transition at the top levels of Wall Street - from panic on the retail and small-scale lending end, to giants like PIMCO with "super balance sheets" concentrating the market.