FSB flags rising vulnerabilities in private credit market

Private credit has expanded significantly, reaching an estimated $1.5 trillion to $2 trillion globally by the end of 2024, with the United States, euro area, and United Kingdom leading this growth.

This expansion is driven by post-crisis bank regulation, borrower demand for tailored financing, and attractive yields for investors.

While private credit supports economic activity by offering alternative solutions, the FSB emphasizes its untested nature in a prolonged economic downturn.

The report focuses on potential vulnerabilities stemming from interlinkages with banks and the underlying credit quality of private credit borrowers.

It also identifies challenges in data availability and transparency, which hinder effective monitoring and risk assessment across the ecosystem, warranting close attention from authorities.

Banks and private credit funds are interconnected through various financing arrangements and strategic partnerships.

Direct bank lending to private credit funds, primarily via credit lines, is estimated at around $220 billion in drawn and undrawn facilities, though commercial data suggests this could be twice as large.

Other linkages include riskier fund portfolio financing and banks providing revolving credit facilities to companies also borrowing from private credit.

Borrowers in private credit often lack public ratings, creating transparency challenges.

Where rated, these borrowers typically have higher leverage and are often rated around single B-, with default rates showing an upward trend when broader measures are considered.