By The Bank of England has issued a warning regarding the vulnerability of risky corporate borrowing, particularly in the private credit and leveraged lending sectors. Despite the absence of significant stress in these markets thus far, the central bank has highlighted the potential for sharp revaluations of credit risk in the event of a deteriorating macroeconomic outlook.
Private Credit Market Surges, But Comes with Risks
The market for private credit has experienced a substantial surge in recent years. Concerns have been raised by Sherrod Brown of Ohio and Jack Reed of Rhode Island, two Senate Democrats, who have expressed their worries to U.S. banking regulators. Since 2015, the private credit market has grown over threefold, reaching a value of $1.6 trillion.
The senators noted that there is a lack of information regarding key features within the private credit market, such as loan terms, lenders’ funding structures, and borrowers’ financial health. They also highlighted the involvement of the traditional banking system in this market, which includes lending to private credit funds, partnering with funds for deal arrangements, and transferring risk to these funds via derivatives.
Overall Risk Environment Remains Challenging
In addition to its concerns about risky corporate borrowing, the Bank of England stated that the overall risk environment continues to pose challenges. These challenges are a result of subdued economic activity, ongoing risks to global growth and inflation, and escalating geopolitical tensions. Furthermore, the full impact of higher interest rates is yet to be fully realized.
Looking ahead, the central bank intends to focus on assessing the risks associated with artificial intelligence and large language models in the coming year. This initiative aims to ensure that the financial system remains resilient in the face of evolving technological advancements.
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