Private credit: growing regulatory concerns and the risks for financial institutions – Part 1: regulatory risks

Private credit has grown into a major source of financing, but its rapid expansion has attracted increasing regulatory scrutiny. Recent reports from the Financial Stability Board, International Organization of Securities Commission and the House of Lords identify concerns relating to leverage, opacity, interconnectedness and liquidity within the sector. This is the first article in a series of two, considering the regulatory and litigation risks arising in the sector. In this first article, focusing on the regulatory risks, we examine how these vulnerabilities, particularly borrower credit quality and valuations, liquidity mismatch and concentration risk, may affect financial institutions. We highlight the growing links between private credit, private equity, insurers and banks, and explore the legal and regulatory risks that may arise if these vulnerabilities crystallise during a period of prolonged market stress. Our second article will consider the growing litigation risks for financial services firms.