US senators warn private credit could threaten safety of banking system
US senators have written to the country’s financial regulators, asking them to assess the systemic risks presented by the fast-growing private credit market.
Sherrod Brown, senator in Ohio, and Jack Reed, senator from Rhode Island, have reportedly written a letter to leaders at the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, asking if private credit could threaten the safety of the banking system.
“In recent years, private credit has become a favoured method of lending to companies of varying sizes by alternative asset managers,” the senators said in a letter seen by Financial Regulation News, a US-based news website.
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“The sector has experienced astonishing growth, with assets more than tripling since 2015 to $1.6trn (£1.27trn) today. Within the next five years, it is projected that the market could grow as large as $3.5trn. At the same time, private credit funds operate in the shadows, and we are concerned that risk may be accumulating in the absence of sufficient oversight and accountability.”
The private credit market is less transparent and more lightly regulated than the mainstream banking sector. The senators questioned whether this lack of transparency obscures its true size and risk.
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“The collapses of Silicon Valley Bank and Signature Bank highlighted how unaddressed risks can accumulate and potentially destabilize our banking system,” said the letter seen by Financial Regulation News. “It is imperative that bank regulators thoroughly assess all types of risks to our financial system, including risks posed by the private credit industry. In light of these concerns, we urge you to use the full extent of your regulatory authority to assess the potential risks that private credit may pose to the safety and soundness of our banking system.”
The letter asks the regulators to outline the steps they are taking to monitor risks in the private credit sector by 20 December.
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