The private credit market doesn’t need further regulation and isn’t as scary as some make it out to be, according to SEC Commissioner Hester M. Peirce.
While private credit can seem riskier than traditional bank lending, “We should not build it up into a monster of our own imagination,” she said Oct. 15 at private credit event hosted by the Securities Industry and Financial Markets Association and law firm Mayer Brown.
“Invoking systemic risk to regulate private credit in the same way we regulate bank lending would engender risks of its own,” Peirce said. “It would homogenize the market, which could make future financial contagion more, not less, likely.”
She then added, “If anything, the growing private credit sector may highlight the need for streamlining our public market regulation. I have expressed concerns about the costs of accessing our public equity markets. We should ask similar questions about our public debt markets.”
Much of the nation’s capital formation occurs outside of the prudentially regulated banking system, and Peirce, one of two Republican SEC commissioners, said that’s a good thing. “Non-banks are more dynamic, more flexible, more nimble, and more responsive than banks to the needs of providers and takers of capital,” she said.
Also, because private credit lenders typically hold loans until maturity, rather than originate loans to distribute them as banks often do, “They have an incentive to conduct thorough due diligence, negotiate strong covenants and devise workable solutions if borrowers cannot pay,” Peirce added.
The $1.7 trillion private credit market has more than doubled in size since 2019, but poses risks, experts say.
The SEC should watch for such risks, but the diversity of private credit arrangements protects against a system-wide problem, according to Peirce. “In general, we should welcome the movement of risk from bank balance sheets to private credit funds,” she said.
