The Financial Stability Board on Wednesday published a report on vulnerabilities in the private credit market and its interlinkages with banks, sizing the global sector at between $1.5 trillion and $2 trillion and highlighting a range of risks that warrant closer supervisory attention.
The report is part of the FSB's work programme to enhance resilience in non-bank financial intermediation.
LEVERAGE AND LIQUIDITY IN FOCUS
The report highlights interlinkages with banks, borrower credit quality and valuation opacity, concentration, leverage and liquidity issues as key vulnerabilities in the private credit sector, according to the FSB's announcement. It flags the connections between private credit funds and banks, insurers and private equity firms as channels through which stress could be transmitted across the financial system.
The FSB said leverage is reflected in opaque, multi-layered structures, and that liquidity issues stem from the growing popularity of funds offering redemption options to investors, which may heighten the procyclicality of private credit.
The report also notes data gaps that hinder monitoring of the sector. Reliable and comparable data on private credit exposures remains patchy across jurisdictions, complicating efforts to assess systemic risk.
MARKET SIZED AT $1.5 TO $2 TRILLION
The FSB estimates the private credit market at between $1.5 trillion and $2 trillion in assets at end-2024, capturing loans made by non-bank lenders directly to companies, typically outside the traditional syndicated loan market. The FSB said the activity has grown rapidly and is heavily concentrated in a few jurisdictions.
Banks and private credit funds are connected through financing arrangements and strategic partnerships; available data across FSB members capture around $220 billion of drawn and undrawn bank credit lines to private credit funds, while some commercial estimates range from $270 billion to $500 billion. Insurers and private equity firms also play major roles in the ecosystem.
Indirect exposures include banks' revolving credit facilities to companies that also borrow from private credit funds, and the growing use of synthetic risk transfers.
The Basel-based body encouraged authorities to close data gaps and harmonise definitions, deepen analysis of interlinkages with private equity and insurers and of liquidity mismatches in private credit funds, and share supervisory approaches. The supervisory approaches to be shared cover risk management and governance for banks and non-banks active in private credit, including aggregation of exposures, valuation practices and the use of private ratings.
The FSB said private credit remains untested in a prolonged economic downturn, with high leverage and concentration in specific sectors potentially amplifying stress.
The report proposes a core set of comparable metrics for authorities to track market size and growth, links with banks and insurers, leverage, liquidity features, concentration, cross-border activity and borrower credit quality.
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