Private credit may lose some of its privacy

investmentnews.com:

The European Union is pushing to bring more transparency to the booming private credit market as regulators worry its rapid growth could threaten the financial system.

The bloc agreed in February on new requirements for what investment funds have to disclose to regulators, and it recently proposed stress testing links between so-called shadow banks and the financial system. Banking regulators in the region, meanwhile, are leaning on traditional lenders to provide more information about where private credit shops get their own funding.

The efforts underscore the growing concerns among some authorities about the lightly regulated asset class, which flourished when stricter capital requirements forced banks to scale back riskier lending after the financial crisis. Recent high-profile failures such as the collapse of Rene Benko’s Signa group or the troubles of landlord Adler Group SA have highlighted how firms that loaded up on debt can spread losses in the financial system.

“The growth in private credit markets has us particularly concerned,” said Elizabeth McCaul, a member of the European Central Bank’s Supervisory Board, which oversees traditional banks. “The sector has grown so much that we should consider how to have some basic reporting made more readily available to supervisors.”

Private credit has remained largely outside the remit of financial regulators because the money used to extend loans typically comes from investors, not depositors. That means any losses only impact the returns for these investors. They don’t ripple through the financial system the way a run on a bank does if its balance sheet is in trouble.

But the growth of the asset class into a $1.7 trillion industry has fueled concerns that it may affect