Stress in that market could lead to “psychological contagion” and thus set off a wider credit crunch, Barr said in an interview with Bloomberg News published Sunday (May 3).
He told Bloomberg that although direct connections between banks and private credit do not yet seem “super worrisome,” there were other areas of concern, including the insurance industry’s ties to private lenders.
“Then you also have the problem of kind of psychological contagion,” Barr added. “People might look at private credit, and instead of saying, ‘This is an idiosyncratic problem, these were high risk loans, the rest of the corporate sector is different,’ they might say, ‘Wow, there seem to be cracks in our corporate sector. Maybe over here in the corporate bond market, there are also cracks.’
“Then you could have a credit pullback, and that could lead to more financial strain,” he said.
As Bloomberg noted, Barr has repeatedly warned of growing risks in the financial system, including the $1.8 trillion private credit market, where investors hurried to withdraw about $5 billion earlier this year as redemption demands jumped for funds with limited liquidity.
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Wall Street banks, which have jumped into private lending, have also warned of future troubles, while still optimistic about the overall health of the asset class, the report added.
Among the banking figures expressing concerns about private credit is JPMorgan Chase CEO Jamie Dimon. During a speech last week, he said the sheer number of companies in this space means not all of them will do well in a downturn.
Some of them “may be brilliant, but I guarantee you not all 1,000 of them are,” Dimon said. “So in my view, because of that and the underwriting standards, we haven’t had a credit recession in so long, so when we have one it will be worse than people think.”
Writing about the industry last month, PYMNTS noted that private credit represents an asset class that sits largely outside the normal transparency standards applied to traditional banking or public debt markets.
“Loans are normally held in private portfolios and valued internally by the funds that originate them, which can mask deteriorating credit conditions until stress becomes impossible to ignore,” that report said.
“The overarching concern may not herald an imminent crisis, but the structure of the market could amplify shocks if credit conditions deteriorate.”
