How worried should we be about private credit?
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BANKING

How worried should we be about private credit?

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A private credit market growing so fast, away from the oversight of bank regulators, may be a new source of systemic risk. With smaller investors taking greater exposure to an asset class whose high returns and low losses look almost too good to be true, there could be trouble ahead.

The IMF is worried about the rapid growth of private credit and the potential for mis-valuations, hidden leverage and little understood linkages between investors and banks to unleash systemic risk in global finance.

Join the club.

Banks have been complaining about an unlevel playing field for most of this decade, and regulators are now also raising the alarm.

The Bank of England devoted a large section of its December financial stability report to the topic, observing that heavily indebted businesses that have borrowed in risker credit markets, including leveraged loans and private credit, are particularly vulnerable to higher interest rates.

It, too, worries about the rapid growth of the private credit market, which has quadrupled in size since 2015, when it stood at between $400 billion and $500 billion.

Let’s remember that regulation has encouraged this migration of some $2 trillion of lending away from banks and transparent public bond markets into the opaquer world of private credit, where “valuation is infrequent [and] credit quality isn’t always clear or easy to assess”, the IMF says in a post summarising its latest Global Financial Stability Report, published on April 8.

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Editorial director
Peter Lee is editorial director. He joined Euromoney straight from Oxford University in 1985, and has written about banking and capital markets ever since, being appointed editor in 1999. He became editorial director of Euromoney in May 2005.
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