Brown, Reed Warn Regulators of Risks Posed by Private Credit Market

WASHINGTON, D.C. – Today, U.S. Senators Sherrod Brown (D-OH), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, and Jack Reed (D-RI), a senior member of the Banking and Housing Committee, urged financial regulators to assess the potential risks posed by the growing private credit market. In a letter to Federal Reserve Vice Chair for Supervision Michael Barr, Federal Deposit Insurance Corporation Chair Martin Gruenberg, and Acting Comptroller Michael Hsu, the Senators urged them to assess the risks that private credit may pose to the safety and soundness of the banking system. The Senators asked that these regulators report back to Congress with information on the necessary steps they are taking to monitor risks posed by this market.

“It is imperative that bank regulators thoroughly assess all types of risks to our financial system, including risks posed by the private credit industry. In light of these concerns, we urge you to use the full extent of your regulatory authority to assess the potential risks that private credit may pose to the safety and soundness of our banking system,” the Senators wrote.

You can read the full letter here and below: 

Dear Vice Chair Barr, Chair Gruenberg, and Acting Comptroller Hsu: 

We write to express concern over the rapid growth of the private credit market. In recent years, private credit has become a favored method of lending to companies of varying sizes by alternative asset managers. The sector has experienced astonishing growth, with assets more than tripling since 2015 to $1.6 trillion today. Within the next five years, it is projected that the market could grow as large as $3.5 trillion.^[1] At the same time, private credit funds operate in the shadows, and we are concerned that risk may be accumulating in the absence of sufficient oversight and accountability.

Unlike the traditional banking industry, the private credit market is subject to minimal, indirect regulatory oversight. The lack of transparency in this market obscures its true size and risk. Troublingly, there is insufficient insight into the private credit market’s key features, including loan terms, lenders’ funding structures, and borrowers’ financial health.

Private credit has developed significant interconnections with the banking system. Banks have engaged in lending to private credit funds,^[2] are partnering with funds to actively arrange private credit deals,^[3] and have begun transferring risk to private credit funds through exotic financial instruments.^[4] These linkages may pose hidden dangers to the banking system, especially as most of the private credit market has not endured a full economic cycle with elevated default rates. Given the sector’s expectations of rapid growth, these risks are already increasing as private credit fund managers continue to collect cash and deploy it on riskier deals.^[5] 

The collapses of Silicon Valley Bank and Signature Bank highlighted how unaddressed risks can accumulate and potentially destabilize our banking system. It is imperative that bank regulators thoroughly assess all types of risks to our financial system, including risks posed by the private credit industry. In light of these concerns, we urge you to use the full extent of your regulatory authority to assess the potential risks that private credit may pose to the safety and soundness of our banking system. Additionally, we request that you each describe the steps your agency is taking to monitor risks in the private credit sector by December 20, 2023.  In your response, please include the following:

1. An analysis of the potential risks to banks and the financial system posed by private credit.
2. A description of the degree to which your agency’s supervisory role creates visibility into private credit markets. Please note any lack of visibility created by limitations on your agency’s supervisory authority.
3. A description of how your agency is working with interagency partners to monitor private credit risk to the banking sector and the financial system.

Thank you for your attention to this matter, and we look forward to your reply.

Sincerely,

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