The European Central Bank (ECB) and the South Korean government have both said they will monitor the global private credit market closely in light of recent concerns in the sector.
Both the ECB and the Financial Supervisory Service, South Korea’s financial regulator, have examined private credit exposure in Europe and South Korea following concerns around software-sector risk and redemption pressure in semi-liquid vehicles.
For the ECB, its analysis of the sector found that the eurozone is not facing systemic risk from recent turbulence in private credit markets, although pockets of the financial system are exposed and some stress may be emerging.
In a recent report, the ECB stated that financial institutions in the euro area appear to have limited direct exposure to private credit, making it unlikely that “private credit in isolation could be a source of systemic financial instability at present”.
Alongside this, the ECB took a broadly positive view of the asset class, stating that private credit could promote long-term growth by channelling funds from long-term investors to innovative firms, thereby supporting the objectives of the EU’s savings and investments union.
However, it said insurance corporations and pension funds in particular could, in an adverse scenario, face more material second-round valuation losses from broader spill overs into leveraged loans, high-yield bonds and equities.
“The market should nonetheless be monitored closely, especially in view of worsening credit quality, possible expansion into retail-oriented structures and a potential role of private credit in AI-related financing,” the ECB wrote.
It also said that reducing the opacity of the asset class, addressing data gaps and working towards a harmonised global definition of private credit would help avoid underestimation of direct exposures and allow risks to be assessed more comprehensively.
Separately, the South Korean government said it will monitor overseas private debt investments from the country, which total around $37bn (£27.5bn).
The government will keep tabs on such exposure by Korean investors while taking market conditions into account, and maintaining a system for close cooperation among relevant ministries to respond to the situation, the regulators and finance ministry said in a statement.
While the authorities said the scale of overseas private debt investments relative to total assets is limited, they added that the risk associated with such investments across the financial sector is deemed to be at a manageable level.
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