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Fed Governor Lisa Cook Highlights Private Credit as Emerging Issue

Federal Reserve Governor Lisa Cook highlighted commercial real estate, private credit and cyber risks as potential issues.

Speaking Wednesday (May 8) at the Brookings Institution in Washington, D.C., Cook provided a current assessment of financial stability and highlighted these issues as potential vulnerabilities.

The commercial real estate (CRE) sector continues to feel the effects of the pandemic and changes in the way many people live, shop and work, Cook said, according to a transcript of her speech posted by the Federal Reserve.

The values of office buildings have been most impacted by these changes, while the values of multifamily properties have dropped over the past year, Cook said. Much of the exposure to CRE loans is in smaller banks, for which these loans make up 30% of their assets. In response, the Fed has stepped up its supervisory work with these banks.

“All told, I view CRE risks currently as sizable but manageable, and I will be paying close attention to the sector in the short and medium run,” Cook said.

Cook identified private credit — direct loans made to businesses by nonbank entities — as an emerging vulnerability. Private credit funds’ assets under management have grown rapidly in recent years and may involve “weak underwriting or excessive risk appetite,” she said.

These funds appear to be well positioned to manage those risks, Cook added. However, they have increasing ties with traditional financial institutions, and a growing number of banks are originating their own private credit deals.

“As a result, I 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,” Cook said.

Cook also highlighted cyber risk in her speech, noting that cyberattacks are being launched at a more rapid pace by criminal groups and hostile governments. She said financial resilience can mitigate the impact of these attacks on the financial sector.

“While strong capital and liquidity positions will not, by themselves, prevent an intrusion, they leave the affected institution in a better position to rejoin the system once the attack is resolved and, most importantly, promote confidence among its counterparties,” Cook said.

Private credit has appeared as an avenue through which corporates can get the capital they need, PYMNTS reported in January. For the lenders, it provides an opportunity to tap into a market worth trillions of dollars.

In April, JPMorgan Chase CEO Jamie Dimon sounded some alarm about private credit in an annual letter to shareholders. Dimon said that “new financial products that grow extremely rapidly often become an area of unexpected risk in the markets.”