US Senator Elizabeth Warren is calling on regulators to closely examine the rapidly expanding private credit market. She cautioned that the recent collapses of Tricolor Holdings and First Brands Group may only be “the tip of the iceberg” regarding the bad debt accumulating at some of Wall Street’s largest banks.
In a letter sent on Thursday, Warren, alongside Senator Jack Reed, requested that key officials, including those at the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), push Treasury Secretary Scott Bessent to conduct a stress test. This assessment should consider “the size, scale, scope, interconnectedness, and mix of activities of the private credit market” in the United States.
The private credit sector, valued at approximately $1.7 trillion, has raised concerns due to its ability to finalize deals more quickly and with less stringent terms than conventional bank lending, thereby introducing additional risks to the financial system.
“In recent months, major banks have reported losses exceeding a billion dollars from just a few poorly underwritten commercial loans,” the letter addressed to high-ranking officials, including Michelle Bowman, the Fed’s Vice Chair for Supervision, noted.
The senators expressed their alarm that regulatory agencies may be inadvertently making the banking system more vulnerable at a time when it needs strengthening.
Furthermore, Warren and Reed urged the regulatory agencies to assess credit risks across all banks with assets of at least $50 billion, paying particular attention to loans to private credit firms and other non-bank financial institutions.
Concerns regarding weaknesses in credit markets and the rise of non-bank lending aren’t confined to US lawmakers. The Bank of England recently initiated a test to evaluate the impacts of potential disruptions in private markets on the broader financial system, involving major asset management companies such as Blackstone Inc., Apollo Global Management Inc., and KKR & Co Inc.
