The reason banks retreated from traditional business lending and became more of a funding source for private credit is precisely tied to this unpredictability. Regulation raised the cost of maintaining certain risk profiles and forced a shift in activities. It is not that banks cannot predict liquidity needs to a degree. They can and they have historically done so reasonably well. Yet modern frameworks force them to hold capital and liquidity in ways that make direct lending less profitable relative to lending to non-bank intermediaries. These intermediaries lack deposit liabilities that could vanish overnight so they can take different risks.

In a way what we are seeing is specialization brought about by regulation. Banks manage payment systems and deposits. Private credit manages long term lending. Insurers manage predictable risk pools. The ironic twist is that regulation intended to make banks safer has led to more credit creation outside the regulated banking sector. This does not remove the aggregate risk from the system. It simply moves it somewhere more opaque and less constrained. That is worth remembering when people talk about the future of finance or the next crisis.