Fed’s Cook highlights emerging risks in private credit
Lisa Cook, governor of the Federal Reserve, has warned of emerging risks in private credit and commercial real estate in a new speech.
However, she added that private credit funds appear to be well placed to manage these risks effectively on behalf of their investors.
Speaking at the Brookings Institution in Washington DC, Cook said that private credit risk represented an emerging vulnerability, due to its rapid growth in recent years.
“History teaches us that rapidly growing lending often involves weak underwriting or excessive risk appetite,” Cook said.
“Overall, I think that the growth of private credit likely has not materially adversely affected the financial system’s resilience.
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“Private credit funds appear well positioned to hold the riskiest parts of corporate lending. These intermediaries generally use little leverage and are organized as closed-end funds, which means that investors cannot withdraw the funding supporting the investments.
“Nonetheless, private credit funds also have growing interconnections with traditional financial intermediaries, including banks.
“Banks are increasingly originating their own private credit deals—such as through business development companies that are operated or minority-owned by the banks themselves.”
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Cook added that she will be monitoring the contribution of private credit to the overall leverage of the business sector and the evolving interconnectedness between private credit and the rest of the financial system.
Regarding commercial real estate, Cook said that the sector continues to experience the aftershocks from the pandemic in the form of lower valuations and lower occupancy rates.
“All told, I view commercial real estate risks currently as sizable but manageable, and I will be paying close attention to the sector in the short and medium run,” Cook said.
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