Systemic Risk in Private Banking: Julius Baer's Degag Exposure and the Shadow Banking Dilemma

The collapse of Julius Baer's lending strategy in the German real estate sector-exemplified by its involvement with the insolvent Degag group-has exposed critical vulnerabilities in private banking practices and underscored the systemic risks inherent in shadow banking activities. As a mid-tier Swiss private bank, Julius Baer's repeated missteps in risk management and compliance have not only dented its financial credibility but also illuminated broader challenges in the global wealth management sector.

Degag and the Shadow Banking Nexus

Julius Baer's exposure to Degag, a German real estate developer, began in 2021–2022, when the bank extended credit lines exceeding €100 million to Degag's project companies. These loans were tied to properties in economically distressed regions like Castrop-Rauxel and Gelsenkirchen, areas marked by aging infrastructure and declining demand. By late 2023, Degag declared bankruptcy, leaving Julius Baer with claims of over €48 million in insolvency proceedings, according to a Cash.ch report. This episode, coupled with the bank's earlier €606 million loss from the collapsed Signa real estate empire in 2023, according to a DBRS Morningstar report, reveals a pattern of overexposure to speculative, high-debt real estate ventures.

Such lending practices align with the characteristics of shadow banking: non-bank financial intermediaries (like Julius Baer's private debt arm) extending credit to opaque or underperforming assets, often without the regulatory safeguards applied to traditional banks. The U.S. nonbank financial intermediation (NBFI) sector alone held $85.7 trillion in assets as of 2023-more than 2.5 times the assets of traditional banks, according to a CRS report. This expansion of shadow banking, driven by entities like hedge funds and private equity firms, creates systemic vulnerabilities through interconnectedness, leverage, and liquidity mismatches.

Systemic Risks and Regulatory Blind Spots

Julius Baer's troubles are not confined to real estate. In May 2025, the Swiss Financial Market Supervisory Authority (FINMA) fined the bank CHF 4.4 million ($5.2 million) for "serious breaches" of anti-money laundering (AML) controls between 2009 and 2019. The regulator highlighted failures to address suspicious transactions involving high-risk clients, including a Russian banker and Indian nationals, according to a CTOL article. These compliance lapses, combined with the bank's repeated loan losses, reflect institutional blind spots in Swiss private banking-a sector historically shielded by secrecy and fragmented oversight.

The systemic implications are profound. Shadow banking activities, such as Julius Baer's private debt lending, often operate in regulatory gray areas, creating "wrong-way risk" where multiple institutions face simultaneous distress. For instance, the 2021 collapse of Archegos Capital Management demonstrated how leveraged bets in shadow banking could trigger cascading losses across global banks, the CRS report observed. Similarly, Julius Baer's exposure to Degag and Signa has amplified concerns about liquidity mismatches and the concentration of risk in commercial real estate, a sector already under pressure from rising interest rates and shifting demand.

Strategic Retreat and Investor Implications

In response to these crises, Julius Baer has exited its private debt business, reducing exposure by over 50% since late 2023 and refocusing on Lombard and mortgage lending, as reported by CTOL. While this pivot aims to mitigate further losses, the bank's residual shadow banking activities-such as its €48 million Degag claims-remain a liability. For investors, the case of Julius Baer serves as a cautionary tale: private banks with aggressive forays into unregulated or opaque markets face heightened risks of regulatory penalties, reputational damage, and operational instability.

Conclusion

Julius Baer's entanglement with Degag and Signa epitomizes the fragility of private banking models that blur the lines between traditional and shadow banking. As the sector grapples with regulatory scrutiny and market volatility, the lessons from Julius Baer's missteps are clear: systemic risk in wealth management is not confined to balance sheets but is embedded in governance, transparency, and the evolving architecture of global finance. For policymakers, the challenge lies in closing regulatory gaps without stifling innovation; for investors, the imperative is to scrutinize the shadowy corners of private banking with the same rigor applied to public markets.