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

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  • Riccardo Russo

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.

Suggested Citation

  • Riccardo Russo, 2026. "Private Credit, SRTs and the Banking System: Mind the Protection Gap," BAFFI CAREFIN Working Papers 26274, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    • Handle: RePEc:baf:cbafwp:cbafwp26274
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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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