Private-credit worries spur Fed review
The Fed is looking into Morgan Stanley, Barclays and other banks’ valuations of private-credit loans with questions about their overall exposure, risk-management, and collateral quality.
The Federal Reserve Bank of New York has been conducting reviews of major banks' loans to private credit firms, aiming to assess their exposure to a rapidly growing but potentially risky sector. Officials have visited JPMorgan, Wells Fargo, Barclays, and Morgan Stanley, inquiring about their overall exposure, risk management, and collateral quality.
The Fed's probe stems from JPMorgan's decision to reduce the value of certain loans, especially those tied to software companies facing challenges from advancements in artificial intelligence.
The review is not an isolated incident; it aligns with the Fed's routine practice of examining banks' holdings, particularly when new risks emerge. Private credit loans have surged significantly, growing from $300 billion in 2016 to over $1.5 trillion in 2021, accounting for 11% of all bank loans. These loans, secured by the firms’ own debt, have raised concerns among regulators due to their potential vulnerabilities in worsening financial conditions.
The European Central Bank has also expanded its scrutiny of private credit, focusing on banks with significant exposure to this market. The Securities and Exchange Commission's recent statement on valuing private assets underscores the importance of rigorous valuations and disclosures, a reminder for lenders to uphold stringent standards.
Earlier this year, private credit faced a market downturn following investor panic about potential losses due to software company underperformance amid AI developments. This led to a notable pullback in funds, with some investors requesting nearly 40% of a single fund in a single quarter, though most funds cap redemptions at 5%. Despite these challenges, lenders often rely on third-party evaluators to determine loan marks, emphasizing a meticulous approach to investments.
While private credit firms have faced criticism for their loan valuation methods, particularly when discrepancies exist between different lenders' assessments and when companies' underperformance fails to align with these marks, recent trends show some signs of stabilization. Redemption rates have declined at several firms, and investor confidence in software deals is gradually returning as alternative financing avenues emerge.
Notably, JPMorgan has been proactive in reassessing its valuations for loans to private credit companies.
Written by urgent.news from Semafor's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
