(April 9): Financial Stability Board (FSB) chair Andrew Bailey warned stresses may be emerging in private credit after the shock to markets from the Iran war.
Bailey, who is also Bank of England governor, said on Thursday that regulators needed to focus on the threat posed by private credit given its rapid rise and the febrile market responses to the conflict in the Middle East.
“Private credit is a relatively opaque world and it’s not yet, of course, because of its relative newness, actually come under stress, and we may be seeing that now,” Bailey said in a hearing in the European Parliament.
Bailey has repeatedly warned of dangers from private credit after its boom since the financial crisis, when efforts to tighten regulation on banks drove corporate borrowers towards investment funds and other routes outside public markets.
There are concerns that any problem in the sector could quickly spread to regulated banks and the wider economy, with Bailey warning of parallels with the subprime debt crisis.
Jamie Dimon, head of JPMorgan Chase & Co, has said there could be more “cockroaches” after the implosion of auto lender Tricolor Holdings and car-parts supplier First Brands Group last year, though he added this month that private credit is unlikely to pose a systemic risk. Meanwhile, the rush of retail investors into private credit funds has slammed into reverse over fears about high-risk investments such as AI infrastructure, forcing some money managers to impose gates on redemptions.
See also: US intelligence shows China set to supply Iran arms, CNN reports
While the FSB chair on Thursday said regulators shouldn’t be surprised by the rapid growth of non-bank lending, Bailey warned of a “double whammy” scenario where volatile markets combined with a loss in confidence in the private credit world. Markets have swung erratically since the US and Israel launched attacks on Iran with increased hedge fund activity in government bond markets thought to be adding to the volatility.
“We’ve got volatile markets, that’s one thing,” he said. “What if the users and the investors and private credits lose confidence in it, and we get a bigger reaction, and what would be the consequences of that? And from a financial stability point of view, we have to be very focused on that.”
Bailey said there is “quite a bit of catch-up to do in terms of the transparency of these markets.” The BOE is conducting a stress test of major private lenders to see how the sector would cope with a severe global downturn.
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