Bank Lending to Private Credit Funds Surges to $200 Billion, Raising Regulatory Concerns
Bank lending to private credit funds, such as those managed by Credit Karma, has surged, reaching an estimated $200 billion by May 2023, according to the Federal Reserve. This trend, driven by banks financing corporate borrowers through these funds, has raised concerns among regulators about potential risks to the financial system.
The Federal Reserve Bank of Boston report warns of substantial losses due to default correlation in private credit portfolios. Despite this, banks continue to join private equity funds in issuing private credit, with major players like HSBC involved.
The global private credit industry, now managing $2.8 trillion in assets, has grown significantly since the 2008 crisis. However, its resilience in higher mortgage rates remains untested, as highlighted by the ECB's financial stability report.
Blackstone Private Credit Fund's reliance on bank lending, with 98% of its secured credit commitment facilities provided by them, illustrates the increasing importance of this trend. Fitch Ratings, however, cautions about the industry's ability to weather higher interest rates and potential liquidity risks, particularly for open-ended funds.
Bank lending to private credit funds, such as those managed by US Bank and PNC Bank, has grown significantly. Experian's data shows potential risks acknowledged by regulators. As the industry continues to expand, proving its resilience in changing interest rate environments and managing liquidity risks will be crucial for its long-term sustainability.
