The Financial Stability Board (FSB) has urged supervisory authorities to enact greater disclosure and oversight across the private credit landscape, as to have a better understanding of the benefits as well as the vulnerabilities of the sector.
In a new report, the FSB details the growth of the asset class, its ability to provide tailored financing options – including to companies with higher credit risks or limited collateral – but also warned of negative impacts.
“Private credit at its current size and scope has not been tested during a severe economic downturn, which could expose leverage and borrower credit quality vulnerabilities,” it stated.
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In particular, the report flags complex interlinkages with banks, borrower credit quality concerns, and valuation opacity.
A lack of available data on direct exposures between private credit and asset managers, banks, insurers and private equity firms is one area where the FSB would like to see greater progress. Another aspect is the indirect exposure, through for instance banks providing revolving credit facilities to companies that are simultaneously borrowing from private credit funds and the growing use of “synthetic” risk transfers.
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The FSB is also wary about the sector’s high leverage and concentration in specific industries and jurisdictions. It proposes a core set of comparable metrics for authorities to track market size and growth, links with banks and insurers, leverage, liquidity features, concentration, cross‑border activity, and borrower credit quality.
The FSB also encourages authorities to close data gaps, harmonise definitions to enhance monitoring, and deepen analysis of financial interconnections and liquidity issues, while sharing supervisory insights.
While in the past, private credit mostly focused on medium-sized businesses and was available only to institutional investors, such as pension funds and insurance companies, today it is increasingly being used by larger companies and becoming more accessible to retail investors, justifying greater supervisory involvement, the FSB said. The total size of the private credit market is estimated to be between $1.5tn (£1.1tn) and $2tn.
