Analysts ring alarm bells over private credit risks
Ask financial regulators what keeps them up at night, and the growth of private credit would probably be among the top answers.
A report published this week by
Moody's
Analytics underscores just why non-bank lending is such a cause for concern in the current climate of volatility. Notably, the report echoes some concerns raised by the
Central Bank of Ireland
in a recent study published in May.
With traditional lenders having largely retreated from the commercial property stage here since the crash, non-bank lending has become an important source of funding for the sector in the Republic.
Typically, these lenders set up here as special-purpose entities, often backed by international players involved in some capacity in private credit markets. Operations of this type now provide most of the new lending to commercial property developers, according to the central bank's Kitty Moloney and Padraic O'Gorman, authors of last month's report. That's a relatively small part of the Irish economy as a whole, but one with historic baggage since the 2008 crisis.
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The trouble, Molony and O'Gorman note, is that by its globalised nature, the private credit sector is more vulnerable to international shocks than traditional banks. It's a sector characterised by a high risk of 'capital flight', meaning these entities are more likely to cut bait in times of crisis, with significant knock-on effects for the Irish property sector.
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It's all the more perturbing given Moody's characterisation of global private credit as a potential 'locus of contagion' in any future financial crises. In the report, researchers from the ratings agency found that the opacity of the international private credit sector is one of its more troubling aspects. They warned that gaps in the data and 'limited information on loan covenants, true portfolio valuations, and the overlap of fund investors' constitute a 'serious issue' for regulators.
Similarly, the central bank said that 'many analytical gaps remain as the market is still quite opaque'. Consequently, it's difficult to be precise when analysing the private credit sector and its reach.
This lack of information, Moody's warned, coupled with the increasing involvement of traditional banks in the private credit market, is a 'common theme' between the current moment and the situation that prevailed in the lead up to the 2008 crisis.
Worrying indeed, particularly at a time of high anxiety across markets and the wider global economy.
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