PE’s push into credit poses financial stability risks, US regulator says
Private equity firms’ aggressive expansion into private credit can lead to financial instability, a leading US banking regulator has warned.
The acting comptroller of the currency Michael J. Hsu said the blurring of lines between banking and commerce pose risks over the next decade, in a speech at Vanderbilt University. He added that the greatest of these is in private credit and payments markets.
Hsu added that the introduction of new evergreen funds, which provide investors opportunities to exit, can introduce new risks, “including redemption risks similar to those faced by open-end bond funds”, which have been cited as a financial stability concern by other regulators previously.
He also highlighted private equity firms’ push into insurance, noting that “since PE firms are not subject to consolidated supervision, it is not possible for regulators and other outsiders to asses how risky and interdependent these activities are”.
Read more: Authorities warn on private credit risks
His comments come at a time when private credit has become increasingly more popular among asset managers and investors. The private credit market as of 2022 has exceeded $1.5tn (£1.2tn) in assets globally, according to Preqin.
Elsewhere, he said the digitisation of banking, with non-banks offering payments services and further changes expected over the next decade in the space, regulators should focus on ensuring that “bank safety and soundness is maintained, consumers are protected and the playing field is level”.
Read more: BoE warns of future trouble for private credit
Hsu suggested the use of a trip wire approach in both payments and private credit to identify potential stability risks, where the regulators would establish a set of metrics and thresholds, which if exceeded would trigger an assessment.
“Innovation, growth, and change are critical to solving problems and making the world a better place. When those forces spin out of control, however, people, communities, and the 19 broader economy can get hurt,” he noted.
Read more: EU to introduce stricter rules for private credit funds