Federal Reserve Governor Michael Barr has issued a warning that stress in the fast-growing private credit market could trigger a 'psychological contagion' and spill over into the broader financial system, according to an interview with Bloomberg News reported by Reuters.
Direct links not worrisome, but insurance exposure a concern
Barr stated that direct connections between banks and private credit firms do not currently appear 'super worrisome.' However, he expressed concern about other areas, such as the insurance sector's exposure to private lenders.
'People might look at private credit, and instead of saying, ‘This is an idiosyncratic problem, these were high-risk loans, the rest of the corporate sector is different,’ they might say, ‘Wow, there seem to be cracks in our corporate sector. Maybe over here in the corporate bond market, there are also cracks,' Barr explained.
He added that 'then you could have a credit pullback, and that could lead to more financial strain.'
Private credit under pressure amid market downturn
Private credit firms have faced increasing pressure during the recent market downturn. Some investors have stepped back due to concerns over valuations and lending standards, following several high-profile bankruptcies.
The comments come as regulators intensify their monitoring of the rapid expansion of private lending markets, which have grown as an alternative source of financing outside traditional banking channels.
Powell's earlier stance on private credit risks
Federal Reserve Chair Jerome Powell had said in March that policymakers were watching developments in the private credit sector for signs of stress. However, he did not currently see risks large enough to threaten the wider financial system.
