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IMF Warns of Rising Private Credit Market Risks

IMF Warns of Rising Private Credit Market Risks

(9 April 2024 – United States) The International Monetary Fund (IMF) has flagged concerns over the unchecked advance of private credit markets globally.

Private credit has expanded to US$2.1 trillion in committed capital and assets globally as of Q4 2023 the IMF reports. Extended by non-bank financial institutions (Fis) such as investment funds lending to corporate borrowers, the market is now approaching a defined size matching syndicated lending and corporate high-yield bonds.

"Leverage is deployed by investors in these funds and by the borrowers themselves. This layering of leverage makes it difficult to assess potential systemic vulnerabilities of this market. The interconnectedness within the private credit ecosystem has also raised concerns” stated IMF Deputy Division Chief in the Financial Supervision and Regulation Division and report co-author, Caio Ferreira.

"This market emerged about three decades ago as a financing source for companies too large or risky for commercial banks and too small to raise debt in public markets. In the past few years, it has grown rapidly as features such as, speed, flexibility, and attentiveness have proved valuable to borrowers. Institutional investors such as pension funds and insurance companies have eagerly invested in funds that, though illiquid, offered higher returns and less volatility” commented IMF Capital Markets Department Advisor and co-author, Charles Cohen.

“Rapid growth of this opaque and highly interconnected segment of the financial system could heighten financial vulnerabilities given its limited oversight. Companies that tap the private credit market tend to be smaller and carry more debt than their counterparts with leveraged loans or public bonds ” added co-authors Fabio Natalucci and Nobuyasu Sugimoto.

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