HSBC Scales Back Private Credit Leverage Business, Adjusts Risk Exposure
Taylor Wilson
HSBC is cutting back-leverage lines to private credit funds whose returns no longer justify the risk; coming alongside Barclays' parallel retreat, the move signals a broader reappraisal of how deeply banks should be wired into private credit.
What exactly is HSBC stopping?
HSBC has told select clients it will not renew their credit lines for back-leverage — the practice where a bank lends to a private credit fund so the fund can make more loans.
The reason is blunt: the returns these funds generate no longer cover the risk HSBC is taking.
This means → HSBC is not leaving private credit entirely. It is redirecting resources toward lower-risk, higher-certainty fund clients.
Why now?
The trigger: UK bridging-loan firm MFS collapsed in February amid fraud allegations, owing banks and private credit firms over £2 billion.
HSBC's loss chain: HSBC lent to Apollo's Atlas SP → Atlas SP lent to MFS → MFS defaulted → HSBC booked a $400 million loss provision.
In plain terms = the bank thought it was one safe layer removed from the borrower. The underlying loan blew up, and the loss traveled straight back up the chain.
Is this just HSBC, or a trend?
It is a trend. Barclays CEO CS Venkatakrishnan said in April the bank is "limiting lending to certain structured-finance counterparties."
Barclays has provisioned £228 million for its direct exposure to MFS.
Earlier, US auto-lender Tricolor and auto-parts company First Brands Group both went bankrupt, prompting multiple banks to re-examine their loan books.
One senior investment banker put it plainly: "We all took another look at our books. It wasn't pretty."
How does the back-leverage chain actually work?
Banks channel hundreds of billions of dollars a year into private credit through back-leverage.
For banks = fee and spread income. For private credit funds = amplified capital, more lending capacity.
This reflects a core tension: banks nominally provide only a "middle-layer" facility, yet they indirectly bear the performance risk of the underlying loans.
The ECB has warned that linkages between banks and private credit funds could allow shocks to "transmit, amplify, and redistribute across the financial system."
What to watch next?
With two major UK banks pulling back simultaneously, private credit funds must find replacement financing on comparable terms.
This means → if alternatives are more expensive, fund lending costs rise — and that cost ultimately reaches the borrowing companies.
The key variable: whether private credit funds can fill the gap without materially raising their cost of capital — a direct test of the market's real resilience.
Content is for reference only, not financial advice.