The changing contours of private credit
Despite a seemingly endless supply of and demand for private credit, the rapid expansion of the market has been a cause of concern for some regulators and executives. Should investors be worried? This brief explores certain aspects of private credit that warrant a close look—including the retailisation of the market and the current interest rate environment. It highlights the implications for financial stability, including the potential for finance to be rendered a disservice to the real economy.
The financial cycle is never eradicated, nor is financial instability ever really extinguished. On the contrary, financial risk moves like liquid mercury out of certain entities and into others. And increasingly credit-fuelled economies are especially prone toward credit crises. In many ways, regulation can be backward-looking, and thus can often be directed toward the last crisis. Over 17 years since the Global Financial Crisis (GFC), regulators maintain a keen focus containing banking crises; justifiably so, as the recent banking wobbles in the United States (US) in March 2023—and those which rippled across the Atlantic—demonstrate that risks are still inherent (and perhaps contagious) within the global financial system.
And yet, looking beyond the traditional banking system, potential vulnerabilities lurk within certain elements of the system of non-bank financial institutions (NBFIs). The late American economist, Hyman Minsky observed that strong medicine can have strong side effects. And one side effect of the regulation imposed upon globally systemic important banks (GSIBs) in the wake of the GFC has been for a swelling of assets under management (AUM) held by the NBFIs. As shown in Figure 1, since the GFC, the spread between the global AUM held by the shadow banks (NBFIs) and those held by the traditional banks has widened considerably. Accordingly, the Financial Stability Board (FSB) has been focused on 'strengthening the resilience' of the NBFIs on a global basis, given the lack of transparency and systemic stress testing within the industry.
This paper can be accessed here.
This paper is authored by Alexis A Crow, ORF, New Delhi.
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