The Scoop
The Federal Reserve Bank of New York has been visiting big banks to review their loans to private credit firms and understand their exposure to a financial industry that has unnerved investors and global policymakers.
Fed officials have gone into JPMorgan, Wells Fargo, Barclays, and Morgan Stanley since the spring with questions about overall exposure, risk-management, and collateral quality, people familiar with the matter said.
The Fed, JPMorgan, Barclays, Wells Fargo and Morgan Stanley declined to comment.
The review was prompted in part by JPMorgan’s move in March to mark down large swaths of loans in private credit portfolios, particularly those to software companies threatened by AI, the people said. The Fed has concluded its review of some of the banks, including JPM, said the people.
It’s not uncommon for the Fed to go into banks to review their holdings, particularly when there are frequent headlines about potential risks. The Fed also does regular on-site evaluations and continually surveys for banks’ risks.
Know More
Private-credit firms are one of the fastest-growing borrower sets for banks, which were chased out of risky lending after the 2008 crisis but have since found their way back into the trade by lending to the firms that replaced them. Loans to nonbank institutions have risen from $300 billion in 2016 to more than $1.5 trillion according to FDIC data, and now account for 11% of all bank loans outstanding.
Those loans are backed by private-credit firms’ own loans, a debt pile that has unnerved regulators. The European Central Bank also recently expanded a probe into private credit, looking at banks with exposures to the market. Last week, the Securities and Exchange Commission released a rare statement about fair value in private assets, serving as a reminder to lenders that they should be rigorous in their valuations and disclosures.
The Bank of England, during its September Financial Policy Committee meeting, said that private credit could be vulnerable to worsening financial conditions after testing the resilience of private markets.
The private credit market got slammed earlier this year when investors panicked about funds’ exposures to software companies, which suddenly seemed obsolete amid developments in AI. The concerns caused investors in certain types of funds to pull out their money at record rates — sometimes requesting nearly 40% of a single fund in a quarter, but most funds have capped at 5%.
Private credit lenders have long been criticized for the way they value their loans, or mark them, in particular when there is disparity between where different lenders value the same loan and when a company’s underperformance fails to translate to their marks. But lenders utilize third-party evaluators to create the marks and say they are making careful investments.
Redemption rates have declined at many of the private-credit firms and some investors have warmed to software deals again, as more of them find avenues to finance themselves both in and out of the private credit market.
Notable
- JPMorgan was early to reassess its valuations for loans to private credit companies.