Fears of artificial intelligence (AI)-driven loan defaults are hammering the shadow banking sector. Major US lenders have seen over $2 billion wiped off their value this week, a direct response to concerns that AI tools will erode the balance sheets of software companies. Anthropic's new AI tool, capable of replacing existing software services, is a key catalyst for the market's reaction.

The S&P Business Development Companies index, tracking 44 private credit funds, has declined by roughly $2.2 billion since Monday. Hercules Capital, a private credit fund, saw shares plummet 8.4%. The index reflects growing worries about the $2 trillion shadow banking sector's exposure to tech. Experts predict loan defaults could reach 13% due to AI disruption.

This follows warnings about lax lending standards in the shadow banking sector after the collapse of Tricolor and First Brands. Moreover, the industry faces an estimated 25-33% exposure to AI-driven disruption, mainly from tech services. Investors are now reassessing their portfolios, as AI continues to reshape the business world.

Looking ahead, the private credit industry faces increased scrutiny. The sector is now at multi-year lows, and the City watchdog is investigating lending practices. This situation echoes concerns voiced by industry leaders, who see a significant threat to investors in private companies, highlighting the potential for software to become obsolete due to AI advancements.