U.S. Sen. Elizabeth Warren (D-MA) voiced her concerns to Trump administration officials with the financial stability risks posed by the growing private credit market.
In a letter to Treasury Secretary Scott Bessent, chair of the Financial Stability Oversight Council (FSOC), Warren called for the creation of a stress test focused on nonbank financial institutions’ private credit exposures.
“The $1.7 trillion private credit market has grown rapidly in recent years, including a 145% increase in the volume of bank loans to private debt funds … In its 2024 annual report, FSOC also acknowledged the ‘potential financial stability risks’ inherent in the private credit market, including ‘opacity, credit risk, liquidity risk, and increasing interconnectedness with banks, insurance companies, and other institutions,’” Warren wrote in the letter. “I also urge FSOC to work with the Office of Financial Research to design and conduct an exploratory stress test of nonbank financial institutions engaged in private credit activities, in alignment with recent exercises conducted by international financial regulators.”
Warren also sent a series of letters to credit ratings agencies seeking answers on their business models. This was done after public reporting that some agencies have provided inflated ratings for private credit products.
“Recent reporting suggests that some companies may be inflating the credit ratings of private credit products, posing potential systemic risks to the financial system. To help us as policymakers better understand the health of the private credit market, we seek details on your company’s business practices—especially as it relates to managing potential conflicts of interest in the development of credit ratings—and your methodology for determining product ratings,” Warren wrote.
The letters went to S&P Global Ratings, Moody’s Investors Service, Fitch Ratings, Morningstar DBRS, A.M. Best, Demotech, KBRA, and Egan-Jones.