Fed’s Kashkari Says Private Credit May Lessen Systemic Risk

(Bloomberg) — The rise of the private credit market may lead to less systemic risk in the US financial system despite a lack of political appetite for increasing bank capital requirements, Federal Reserve Bank of Minneapolis President Neel Kashkari said.

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“It’s scary at some level, because it’s exploded to a trillion dollar plus market fairly quickly,” Kashkari said in Buenos Aires on Monday. “But as I’ve examined it, a bank in the US today — a big bank — is levered roughly 10 to one, 10 times as much assets for their equity. These private credit vehicles are typically levered one to one, so it’s much less leverage.”

Private credit — which generally refers to loans from non-banks — has been surging over the past few years, offering investors attractive returns versus other fixed-income products in an environment of rising interest rates. For borrowers, it’s become an alternative source of funding that does away with many of the more stringent requirements that are typical in bank lending.

Kashkari, said private credit vehicles may also introduce less risk because they typically lock in capital for longer compared to banks, which need to provide overnight liquidity.

“So where does systemic risk come from? The intersection between leverage and maturity transformation. So on both those dimensions, these private credit vehicles look like they’re much lower risk than banks,” he said during a Q&A session at Torcuato di Tella University.

“While I wish we had tighter regulation on the banks, I’m actually cautiously optimistic that some of these market developments might actually lead to less risk — at least less systemic risk — in the financial system,” he added.

Regulators around the world have increased their scrutiny of the burgeoning $1.7 trillion private credit market in recent years. While many have dismissed concerns that the industry poses risk to the financial system, some have called for increased transparency and reporting.