Two senators urged federal regulators to monitor risks that the private credit market may pose to the financial system, citing the industry's lack of regulatory oversight.
Senate Banking Committee Chair Sherrod Brown, D-Ohio, and Sen. Jack Reed, D-R.I., who serves as a member of the Banking Committee, wrote in a Nov. 29 letter to regulators that "the lack of transparency in (the private credit) market obscures its true size and risk."
"Troublingly, there is insufficient insight into the private credit market's key features, including loan terms, lenders' funding structures, and borrowers' financial health," the senators wrote to Federal Reserve Vice Chair Michael Barr, Federal Deposit Insurance Corp. Chair Martin Gruenberg, and Acting Comptroller of the Currency Michael Hsu.
The senators also warned that private credit is now significantly connected to the banking system.
"Banks have engaged in lending to private credit funds, are partnering with funds to actively arrange private credit deals, and have begun transferring risk to private credit funds through exotic financial instruments," the letter stated.
Given the collapses of Silicon Valley Bank and Signature Bank, the senators contend it's "imperative that bank regulators thoroughly assess all types of risks to our financial system, including risks posed by the private credit industry."
The lawmakers specifically ask for the Fed, FDIC and OCC to describe the steps their agencies are taking to monitor private credit risks in responses due Dec. 20. The responses should include a description of the potential risks private credit poses to the banking system and financial sector, to what degree the agency's actions increase visibility in the private credit market, and how the agency is working with interagency partners to monitor and address such risks.
In early November, two PIMCO executives also told Bloomberg they worry about the risks the private credit industry poses given its lack of regulation. Jamie Weinstein, a portfolio manager for PIMCO's alternative investment business and Christian Stracke, PIMCO's president and the global head of its credit research group, said the lack of clarity surrounding the private credit market is something regulators should look at more closely.
However, both the American Investment Council, a private equity advocacy organization, and the Managed Funds Association, a trade association for the alternative asset management industry, pushed back on the idea that private credit poses a risk to the financial system.
"In this economy, private credit is helping small businesses get capital to grow and succeed," AIC President and CEO Drew Maloney said in a Dec. 1 statement.
"We agree with the Federal Reserve that private credit is not systemically risky," Maloney added, referencing a Financial Stability Report that the Federal Reserve Board released in May, which concluded that financial stability risks posed by private credit funds "appear limited."
In a separate Dec. 1 statement, MFA President and CEO Bryan Corbett defended private credit and said the industry is already well-regulated.
"The growth of private credit limits risks in the banking system because the capital provided by credit funds comes from institutional investors, not depositors with a government backstop," Corbett said. "Increased scrutiny of private credit is misplaced. The SEC already has a robust regulatory regime for the industry that grants the regulator insight into the activities and health of funds."
