U.S. Senators Sherrod Brown and Jack Reed have expressed concerns over the risks associated with the expanding private credit market. In a letter addressed to Federal Reserve Chair Jerome Powell and Vice Chair Michael Barr, they urged federal banking regulators to take measures to safeguard savers and consumers from potential threats posed by this sector's growth.
The senators emphasized the need for comprehensive supervision of the connections between banks and private credit firms. They noted that "as the private credit market continues to strengthen its bonds with banks, Americans will be relying on you to ensure the continued safety and soundness of the banking system."
This action follows a previous letter sent by Brown and Reed in November 2023, which highlighted issues such as minimal oversight, lack of transparency, and significant interconnectedness with traditional banking systems. The senators underscored that these concerns have intensified as the market has grown in size and complexity.
The letter pointed out several risks identified by U.S. and foreign regulators, including smaller companies borrowing more heavily in private credit markets compared to those using traditional capital structures. The opaque nature of private loan valuations was also cited as a concern.
Brown and Reed also raised alarms about the industry's pursuit of growth through complex structures and new investors. They noted that "private credit funds see an opportunity to take share from banks’ traditional business while avoiding traditional regulatory oversight."
They mentioned specific practices like synthetic risk transfers (SRTs), where bank loans are tied up globally, posing challenges due to their interconnectedness during times of financial stress.
The senators stressed that the Federal Reserve must prioritize data collection and risk monitoring within this sector, focusing on hidden risks linked with traditional banking systems.
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