U.S. Sens. Sherrod Brown (D-OH) and Jack Reed (D-RI) are urging financial regulators to assess the potential risks posed by the growing private credit market.
In a letter to leaders at the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, the senators said they would like to know if private credit could be a threat to the safety and soundness of the banking system.
“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. 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,” the senators wrote.
They noted that unlike the traditional banking industry, the private credit market is subject to minimal, indirect regulatory oversight. This lack of transparency obscures its true size and risk, they added.
“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,” the Senators wrote.
They asked the regulators to describe the steps their agencies are taking to monitor risks in the private credit sector by Dec. 20.