According to informed sources, amid a surge in redemptions from private credit funds and rising non-performing loans within the industry, the Federal Reserve is asking major U.S. banks to provide detailed information on their exposures to private credit.
The sources indicated that the questions posed by Federal Reserve examiners are aimed at assessing the level of stress in the private credit sector and the potential for it to spread to the broader financial system.
As part of a series of inquiries integrated into routine supervisory processes, the Fed is paying particular attention to loans that private credit funds have obtained from banks. Such borrowing can amplify returns in favorable market conditions, making private credit funds more attractive; however, in adverse environments, it could expose banks to potential losses.
The sources also noted that the U.S. Treasury Department is conducting similar inquiries into the insurance industry’s exposure to private credit.
Representatives for both the Federal Reserve and the Treasury have so far declined to comment.
These inquiries signal that U.S. regulators are intensifying efforts to understand potential stresses emanating from the private credit sector. The industry has grown to a size of $1.8 trillion and, while initially targeting institutional investors, is increasingly being marketed to individual investors as well.
Wall Street banks maintain close ties with private credit firms. Credit funds rely on banks for asset custody services and also depend on them for credit lines. Should private credit portfolios deteriorate, the value of collateral that banks depend on could be at risk.
In addition to the Federal Reserve, the Treasury Department is also advancing its investigation into insurers’ related exposures. Insiders say regulators have established a dedicated team to oversee this effort.
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