The Financial Stability Board (FSB) is sounding a warning about the systemic risks posed by the evolution of the private credit sector.
In a report Wednesday, the global policy group outlined the vulnerabilities posed by private credit amid a period of rapid growth and deepening connections with the mainstream financial sector — including the fact that the sector’s performance hasn’t been tested in an economic downturn or faced a period of prolonged market stress.
Among other things, the report flagged concerns about credit quality amid high leverage and high sector concentration, along with a lack of transparency when it comes to valuation in the trillion-dollar market.
“Valuation opacity and reliance on private credit ratings can amplify strains in stress,” the FSB warned, noting that the lack of public ratings makes it difficult for regulators to develop a comprehensive view of the market and that the growing use of private ratings warrants monitoring.
Private credit also carries concentration, leverage and liquidity risks, it noted.
“Concentration arises from significant exposure to sectors such as technology, health care, and services. Leverage is reflected in the presence of opaque, multi-layered structures. Liquidity issues stem from the growing popularity of funds offering redemption options to investors, which may heighten the procyclicality of private credit,” the FSB said.
The report also warned that data gaps are hindering regulators’ effective oversight of the sector.
“Differences in definitions across jurisdictions and limited fund‑ and loan‑level information make it hard to assess exposures and potential transmission channels,” it said.
In response, the FSB called on regulators and policymakers to take action to close those data gaps, enhance monitoring and deepen their analysis of the connections between the private credit segment and other parts of the financial system — including asset managers, banks, insurers and private equity firms — to identify potential liquidity mismatches in private credit funds.
The report also proposed a core set of metrics for authorities to use to track the market’s size and growth, its links with banks and insurers, along with leverage, liquidity, concentration, cross‑border activity and borrower credit quality.