Federal Reserve Wants Banks’ Info on Private Credit Dealings

The Federal Reserve wants America’s biggest banks to share details about their private credit exposure.

That’s according to a report Friday (April 10) from Bloomberg News, which cited sources familiar with the matter who say the request comes after a wave of redemption from the funds, and an uptick in troubled loans in the private credit space.

These sources say the Fed’s query is designed to determine the amount of stress in the private credit sector, and its potential to infect the larger financial system. Additional sources told Bloomberg that the Fed also posed similar questions to the insurance industry.

The report noted that these questions are among the strongest indications to date that regulators are hoping to get a picture of the strain facing the $1.8 trillion private credit market. Private credit has attracted more regulatory attention of late as investors scramble to pull their money amid pressure on retail credit funds.

An increasing number of global regulators have sounded the alarm on the risks of private credit, which uses investor money rather than bank deposits to make loans.

And as covered here recently, it is an asset class that “exists largely outside the transparency standards applied to traditional banking or public debt markets.”

Loans are usually held in private portfolios and valued internally by the funds in which they originate, something that can obscure deteriorating credit conditions until stress becomes impossible to overlook.

Financial Stability Board Chair Andrew Bailey said last week that the industry could be facing more stress after war-related market upheaval. The Financial Stability Oversight Council said in March that it had discussed recent developments in the private credit sector, the report added.

“Private credit is no longer a niche corner of finance,” PYMNTS wrote late last year. As nonbank lending expands and increasingly interweaves with banks, insurers and FinTech firms, the risks posed by opaque exposures and shifting funding channels become a systemic concern.”

The report also cited Fed data showing a surge in bank loan commitments to nonbank financial institutions, making the nonbank sector a significant part of bank portfolios.

“If a sharp economic downturn, rising interest rates or refinancing shock triggers defaults in private credit, the fallout could ripple broadly, from private firms to funds, to banks and beyond,” PYMNTS added.