It's not. It's just that we're seeing potentially 10% losses on the portfolio level [1], which could imply up to–up to!–5% losses to the banks' loans to those lenders.
Again, tens of billions of dollars of losses are totally absorbable. But Morgan Stanley's stock price took a hit when it gated one of these funds [2]. And some banks (Deutsche Bank, somehow, fucking again, Deutsche Bank) have small ($12n) but concentrated portfolios where a single wipeout could materially impair their ~$80bn of risk-weighted assets.
[1] https://www.reuters.com/business/us-private-credit-defaults-...
[2] https://www.wsj.com/livecoverage/stock-market-today-dow-sp-5...
They are, in isolation. The _problem_ is that PE doesn't generally trade assets in public, which means that valuation only really come when you're either wanting to buy, wanting to sell, wanting to re-loan or in deep shit.
This means that something like MFS can happen (https://www.reuters.com/business/finance/mfs-creditors-claim...) where assets appear to be used to raise two different loans without the other lender knowing.
But! banking can absorb a few billion right? yes, so long as people are not asking questions about other assets.
Because PE assets are not publicly traded (hence private in private equity) the value of assets are calculated at much lower rates than on a public market. This means that the assets that PE holds could be wildly over or under valued. The way we assess the value of PE holdings is thier looking at the Net Asset Value calculations (which might be done twice a year) or infer the value based on public information.
Now we are told that markets are rational and great at working the value of things. This dear reader is bollocks. Because PE is a black box, if a class of asset that they hold (ie SaaS buisnesses, or high street stores, or coffee trading etc) looks like its not doing well, people will start to write down the value of people holding loans given to PE, or shares in PE.
This creates contagion, because one PE company is in distress, the market goes "oh shit, the whole thing is on fire" and you get bank runs (because where is the money coming from to loan to PE? thats right banks, eventually)
These private credit numbers are estimates provided by Moody's, who were famously clueless about the scale of mortgage bond risk even as they stamped them all with a AAA rating.
The liquidity challenges of a $1.2T shock to the economy is meaningful, because it has knock on effects on equity as well.
When private credit (which is propping up private valuation) falls, private equity also falls and then everyone realizes that everyone else has been swimming naked.
In a catastrophic scenario: if the whole asset class went to 0 (on the banks asset sheet they would lose 2.5% - absorbable pain assuming its not leveraged through creative financial mechanisms).
I would wager that risk is more concentrated on certain institutions instead of across the board so acute pain likely.
Apparently they operate on very low level of tolerable risk (way lower than I thought)
Total bank balance sheets are about $25T.