Wall Street sees this opaque corner of financial markets as the likeliest source of a credit crisis, Bank of America says

• Shadow banking tops commercial real estate as the most likely source of a credit event, according to a BofA survey.
• Alarm has risen over private credit, given its rapid growth and loose oversight.
• Investors are still optimistic on the economy, and 68% expect a global soft landing.

Bank of America's latest Global Fund Managers survey found that shadow banking has surpassed commercial real estate as the likeliest culprit of a future credit event.

Nearly a third of surveyed investors consider the opaque sector of the financial markets the most likely source of future fallout, overtaking the 24% who still see a bigger risk in the property market. In June's survey, commercial real estate held the top spot.

Bank of America Global Fund Manager Survey

Shadow banking refers to a group of lenders outside of the traditional banking system and which are often less regulated. Worries have risen in recent years over unforeseen systemic risks.

Outside the purview of regulators, this area of the credit market has ballooned. According to the IMF, it notched $2.1 in assets and capital last year. But while its high returns have attracted investors, the space is dominated by opaque credit quality and infrequent valuations, analysts wrote in April.

Top Wall Street commentators have also bashed shadow banking. JPMorgan chief Jamie Dimon went on the offensive last May, warning of bad actors in the industry.

"There could be hell to pay," he then said. "I've seen a couple of these deals that were rated by a rating agency and, I have to confess, it shocked me what they got rated."

Related stories

Meanwhile, BofA's survey indicates that fund managers are still keeping their eyes on commercial real estate, a sector that has wobbled under the weight of high interest rates.

Between tighter monetary policy and a significant pullback in office demand, worry has mounted regarding whether commercial real estate entities can pay off their debt. Already, $1 trillion is due to mature by the end of this year, and defaults are hitting even high-quality bonds.

Most exposed to the sector are regional banks, and concern has persisted about consequences in this sector.

Otherwise, BofA found that investors remain optimistic overall, with 68% expecting the global economy to achieve a "soft landing." In fact, 39% consider monetary policy as too strong worldwide.

Concerning the US, the bank indicated that this enthusiasm may be too strong:

"We believe "hard landing" risks are underpriced given the slowdown of US consumer, labor market, government spending… this makes us most bullish on bonds and gold in H2'24," it wrote.

Meanwhile, "geopolitical conflict" topped "higher inflation" as the biggest tail risk for the first time in six months, BofA found.