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CNBC
30-05-2025
- Business
- CNBC
Ron Insana: Private credit industry poses a familiar risk as investors chase returns
A crisis in the world of private credit may not unfold in the near term, but investors should think about what may happen when the next recession comes along. The Boston Federal Reserve recently published a paper exploring whether or not the surge of dollars into private credit will eventually pose systemic financial risk to the lending industry. While the paper didn't directly answer the question posed, it's important that it was asked at all. The private credit asset class has swelled to about $1.7 trillion . Firms in the industry provide loans to businesses in an environment where banks had pulled back from lending in the face of regulatory constraints. Recently, however, banks have begun providing financing to those same private credit firms in the form of lines of credit. Those lines of credit help smooth out the distribution of capital as private credit firms take time to draw down the investments made by their limited partners. "Our analysis of Federal Reserve and proprietary loan-level data indicates that the growth of private credit has been funded largely by bank loans and that banks have become a key source of liquidity, in the form of credit lines, for [private credit] lenders," the Boston Fed said in its report. "Banks' extensive links to the PC market could be a concern because those links indirectly expose banks to the traditionally higher risks associated with PC loans," the Boston Fed added. Rising risk in the event of delinquencies Banks may expose themselves to rising risk over time if private credit firms take on less secure loans than the banks would normally fund. Ultimately, this could have an adverse effect on the banks' balance sheets. Typically, this becomes more obvious when the economy slows or tips into recession, pushing up both delinquencies and defaults. There are additional questions not yet posed by the Boston Fed's study. For instance, are big banks using leverage to enhance the returns on the credit lines they are extending to private credit vehicles? A similar question can be asked of the private credit firms: Are they using additional leverage so that their investors will reap higher rates of return than would otherwise be available? If the answer is yes, we may be staring at a smaller version of the Global Financial Crisis one day in the future. A familiar story One seasoned lawyer I spoke with, who assists in structuring private credit deals, tells me that the collateral for the bank lines of credit being handed out are the very loans made by the private credit firms. Worse yet, many of these vehicles are so-called " covenant-lite loans " meaning that the lending terms are less stringent than those of more conventional loans. Stop me if you've heard this story before: Leverage on top of leverage, along with lax lending standards and the prospect of financial deregulation could end badly for both banks and investors. By extension, financial markets could also suffer under the very systemic risk the Federal Reserve Bank of Boston is questioning. That can be quite a toxic brew if private credit firms and banks are all doing the same thing at the same time. It would be similar to what financial firms did with collateralized debt obligations prior to the real estate and credit crisis of 2008. For now, there is one meaningful difference: Most private credit loans currently being made are at the top of the capital structure. In other words, these loans made by the private credit firms are collateralized by the hard assets of the borrower. That's known as senior secured debt. That mitigates risk as lenders can seize and sell assets to cover the credit they had extended to firms. With so much "dry powder" in the private credit space, eventually lenders will be reaching for yield by making loans to lower quality borrowers. Those are the loans that go bad quickly during a downturn. Rather than being a diversifier of risk, even if they are syndicated to a wide swath of investors, these loans turn into transmission wires of trouble and travel up the entire financial daisy chain. This is an area that will require constant scrutiny from regulators at the Fed, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and other supervisory powers. The additional risk here is that those very supervisory functions so critical to the safety of the banking system and financial markets are being gutted. We've seen this movie before. Excess capital eventually chases too few deals. Lots of leverage to enhance returns enhances risk, especially as regulators fail to see Wall Street's excesses. This is my first discussion of risk in the private credit space, and the questions being posed will be deemed absurd by executives in the private credit world. Hold onto your wallets: Not everything is as secure as it may seem. —Ron Insana is a CNBC contributor.
CBS News
09-04-2025
- Business
- CBS News
Why a $10,000 long-term CD makes sense this April
In today's unique economic atmosphere, in which inflation is still a concern, interest rates are still high, and, now, stock market uncertainty is elevated, there are few secure ways to both grow and protect your money. Some options can offer protection but result in limited growth opportunities. Others, however, could cause your money to grow, but they could also wipe out a healthy portion of your bottom line should market conditions change unexpectedly. Against this backdrop, then, and with limited attractive alternatives, a certificate of deposit (CD) account makes sense to open now. CDs come with fixed interest rates , meaning the rate you open the account with now will be the same one the account matures with in the future. And rates on CD accounts are still relatively high, even if they're not quite as elevated as they were in 2023 and early 2024. Plus, with a long-term CD (one with a term of a year or more), you can earn that high rate for 18 months or even longer. But those aren't the only reasons why it could be worth putting $10,000 into a long-term CD this April. Below, we'll expand on three others. See how much interest you could be earning with a top CD account here . Here are three important reasons why a $10,000 long-term CD could be advantageous to open this April: Stock market volatility may have caused a healthy portion of your portfolio to be wiped out in the last week. And with signs of additional uncertainty to come, losses there are unlikely to have been fully realized. But if you had put some money into a CD before that happened, or do so now ahead of the next big market swing, you can better protect your money against stock market volatility. That's because rates here are fixed (unlike savings accounts that have variable returns), allowing you to precisely determine your returns. And CDs are also safe , as they're FDIC-insured up to $250,000 per account, making them an extra secure spot to park your money now. Protect your money against stock market changes today . Right now, you can secure a 4.16% rate on an 18-month CD, 4.15% on a 2-year CD and 4.15% on a 3-year CD. With a $10,000 deposit, that results in returns of $630.45, $847.22 and $1,297.38, respectively. While it will take some time for those returns to materialize, they're guaranteed as long as you don't withdraw the money early (at which point penalties are issued). And if you deposit more than $10,000 or opt for an even longer CD term, you'll earn even more. That said, a CD is only valuable for those who can part with their money for the full term. If you don't think you can afford to, you may be better served by exploring high-yield savings accounts , which also have elevated rates but won't require you to forego access to your funds. Predicting the future of interest rates is difficult to do with precision, but essentially impossible to do now amid stock market volatility and economic policy changes. Still, even before the recent market changes, the Federal Reserve had already cut interest rates three times in 2024. And inflation is substantially lower than the over 9% it had hit in June 2022. So the market conditions are right for another rate cut, perhaps sooner than expected (the Federal Reserve meets again in May). Should those cuts be issued, rates on CDs will drop in response, perhaps even before a formal rate cut is announced. So it makes sense to get ahead of those changes by locking a five-figure amount of your money in a high-rate CD account now. A $10,000 long-term CD isn't right for every saver, especially if you need to maintain steady access to your funds. For others, however, particularly those seeking protection against stock market volatility, a substantial return on their money and a reliable way to protect against rate cuts later this year, it could still make sense to pursue this unique deposit amount and savings vehicle. Just be sure to shop around online to compare rates and lenders to improve your chances of finding an account with the highest rates and most attractive terms. Get started with a long-term CD here today .
