Private Credit, SRTs and the Banking System: Mind the Protection Gap

Riccardo Russo

No 26274, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: Private credit funds have emerged as major players in corporate lending and protection sales to banks within the SRT market. This paper models a contagion loop between the banking system and private credit funds working through SRTs. The loop is activated by two elements whose interaction is scarcely formalised in the literature: the circular leverage embedded in SRT financing and the liquidity mismatch introduced by semiliquid private credit funds. Together, they can result in shrinking protection for banks, i.e. a protection gap. Implemented through a simulation, the model provides evidence on the impact of this mechanism on banks’ capital relief and lending capacity, and represents a useful risk-assessment tool to both private and public agents.

Keywords: private credit; SRT; banking system; doom loop; systemic risk (search for similar items in EconPapers)
JEL-codes: C15 G01 G21 G23 G28 (search for similar items in EconPapers)
Pages: 18
Date: 2026
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