(28 October 2024 – Australia) The Reserve Bank of Australia (RBA) finds that the local private credit market poses low direct risks to financial stability despite inherent transparency concerns.
The RBA has calculated that the Australian private credit market is valued at A$40 billion and represents 2.5 percent of total business lending balances totalling A$1.06 trillion according to APRA’s Monthly Banking Statistics.
The figure is significantly less than other estimates such as EY’s A$188 billion total but based on the level of lending to local businesses facilitated by asset management firms from investor money pooled into managed funds.
The central bank flagged that private credit valuations are less frequent and subjective, posing risks of reassessment during economic shocks. While default rates remain subdued, the sector’s resilience to a major downturn remains untested with higher losses often incurred during defaults.
The IMF has also raised concerns about liquidity risks within Australia’s superannuation system due to a growing share of illiquid investments such as private credit.
“Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market. For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely” the RBA stated.
“Although private credit funds’ leverage appears low compared with other lenders, end borrowers tend to be more highly leveraged than those in public markets, increasing the risks to financial stability.”