The Australian Prudential Regulator, APRA, has said it believes private credit risks are currently “contained domestically” but could spill over to Australia from abroad.
In a release today, APRA said domestic private credit is estimated to currently be worth around AUD$200bn (£106bn) – roughly three per cent of the Australian banking system – and risks “appear contained domestically”, but it warned they are “growing abroad, with potential spillovers to Australia”.
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“Private credit remains relatively small in Australia, despite rapid growth over the past decade. This small size helps to contain immediate system-wide risks. But risks and vulnerabilities from private credit are growing internationally, where opaque structures, infrequent valuations and defaults have prompted heightened global regulatory scrutiny,” it said.
However, it said Australian institutions are exposed to offshore developments in private markets through multiple channels, “creating potential spillover risks that warrant close monitoring”.
For example, it said that around half of superannuation funds’ private market exposures are international, and banks have increased their appetite for international funds finance products.
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“When structured and governed effectively, private markets can deliver clear benefits to the global financial system, including diversification for investors and access to longer-term or more flexible financing for borrowers. These features have supported strong growth in recent years. However, the same characteristics can also give rise to vulnerabilities, particularly where opacity, leverage and weaker oversight are present,” it said.
“The growing scale, complexity and cross-border nature of private markets, including private credit, mean international stress could transmit more quickly and through more channels than in the past. APRA continues to monitor areas of vulnerability for entities exposed to private markets, particularly where global developments could transmit to Australia.”
