Moody’s welcomes central banks’ focus on private credit risk
Moody’s Ratings has welcomed the European Central Bank’s (ECB) plans to outline new risk management expectations for banks that are exposed to private credit and private equity.
“The ECB’s focus on private equity and private credit risk follows the similar concerns from Bank of England,” said Moody’s managing director of global financial institutions and private credit Ana Arsov, “and focusing on demonstrating integrated risk management of these growing exposures of banks’ balance sheets is positive.”
The ECB outlined its concerns today in a supervision newsletter, which said: “The failure to properly identify – on an aggregate level – exposures to companies that also borrow from private credit funds means that this exposure is almost certainly understate and the concentration risk cannot be properly identified and managed.”
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In June, the Bank of England raised similar concerns in its Financial Stability Report.
“Vulnerabilities from high leverage, opacity around valuations, and strong interconnections with riskier credit markets mean the sector has the potential to generate losses for banks and institutional investors, and cause market spillovers to highly correlated and interconnected markets such as leveraged loans and private credit,” it said.
“All of which could reduce investor confidence, further tightening financing conditions for businesses.”
A survey published by Moody’s last month showed that the pace of lending growth to private credit has been rapid across banks of all sizes, with only a few outliers.
Read more: EU watchdog warns on bank/private credit tie-ups
The survey found that banks’ funded bank loans to private credit increased about 18 per cent annually between 2021 and 2023, compared with just six per cent annual growth in total loans, keeping pace with 19 per cent annual growth in capital raising for the sector over that period.
The survey also revealed that loan concentrations to private credit were higher among banks with lower credit strength, with some lower rated banks also pursuing aggressive expansion that could raise credit risks, especially if they have less established track records of lending to the ecosystem or have less robust risk-management infrastructure.
Larger banks typically have more established relationships with highly sophisticated investors like private credit market participants as well as more robust infrastructure to control the associated risks.
Read more: Most sovereign wealth funds plan to ramp up private credit allocation
