Britain’s top financial regulator, the Bank of England’s Prudential Regulation Authority (PRA), has requested details from banks regarding their exposure to the private credit market, which has been identified as a top systemic danger. The PRA has given banks such as JP Morgan, Goldman Sachs, and Bank of America until the end of 2023 to respond to this request. The global market for private credit, which involves leveraged loans to indebted companies, has grown to nearly $1.5 trillion in 2022, representing a significant increase from 2020.
The request by the PRA, which has not been previously reported, includes the sharing of information about individual clients. Banks with wholesale operations and private equity businesses have been increasingly involved in the private credit market as they search for higher returns. However, the lack of transparency in this sector means that the true size and risks may not be fully visible on banks’ balance sheets.
The Bank of England’s financial stability report this week highlighted the vulnerability of riskier corporate borrowing, specifically mentioning private credit and leveraged lending. The report stated that the opacity of the private credit markets makes it challenging to monitor risks both in the UK and globally. The PRA declined to comment on this matter, as did JP Morgan, Goldman Sachs, and Bank of America.
Private credit firms typically provide loans to emerging companies on a floating-rate basis, which means that rising interest rates can pose a threat to their ability to repay. Regulators worldwide have expressed concerns about this opaque corner of finance, as a shock in the private credit market could result in a liquidity squeeze. This concern is heightened following this year’s deposit runs at Credit Suisse and Silicon Valley Bank.
In response to these risks, Britain’s banking regulators have been conducting meetings with top executives from lenders to discuss the issue. They aim to map out the banking exposure to the private credit market. Nathanaël Benjamin, a senior regulator at the Bank of England, highlighted the complex web of connections in the market, with banks lending to portfolio companies, fund investors, asset managers, and others.
Bankers themselves have also expressed concerns about the risks associated with private credit. Colm Kelleher, chairman of Swiss bank UBS, stated in November that there is clearly an asset bubble in private credit. In addition to the PRA’s request, the Financial Conduct Authority (FCA) is conducting its own review, focusing on the leveraged loan market and collateralized loan obligations (CLOs), which are risky loans bundled together and sold in tranches.
At a roundtable in London, the FCA invited the chairs of banks with major wholesale operations, including JP Morgan and Goldman Sachs, to discuss priorities for the coming year. Banking exposure to private credit markets and private equities was highlighted as a concern during the meeting. The regulators’ efforts aim to address the risks associated with private credit and ensure the stability of the financial system.
More detail via Reuters here… ( Image via Reuters )