Moody’s has welcomed the European Central Bank’s plans to set new risk management expectations for banks with exposure to private credit and private equity.
“The ECB’s focus on private equity and private credit risk follows similar concerns expressed by the Bank of England, and the focus on demonstrating integrated risk management of these growing exposures to banks’ balance sheets is positive,” said Anna Arsoff, managing director for global financial institutions and private credit at Moody’s. “.
The ECB set out its concerns today in a supervisory bulletin, which said: “The failure to properly identify exposures to companies that also borrow from private credit funds – at an aggregate level – means that this exposure is likely underestimated and concentration risks cannot be properly identified and managed.” correct”.
In June, the Bank of England raised similar concerns in its financial stability report.
He said: “Vulnerabilities caused by high leverage rates, uncertainty surrounding valuations, and strong correlations with riskier credit markets mean that the sector has the potential to generate losses for banks and institutional investors, and cause market spillover into highly correlated and interconnected markets such as leveraged loans and credit.” “All of this would reduce investor confidence, further tightening financing conditions for companies.”
A Moody’s survey published last month showed that the pace of lending growth for private credit was brisk across banks of all sizes, with only a few anomalies.
The survey found that bank-funded loans for private credit increased by about 18 per cent annually between 2021 and 2023, compared with just 6 per cent annual growth in total loans, keeping pace with the 19 per cent annual growth in capital raising for the sector over that period.
The survey also revealed that loan concentrations for private credit were higher among banks with lower credit strength, with some lower-rated banks also seeking aggressive expansion that may increase credit risk, especially if they have less established track records in lending to the ecosystem or have infrastructure. Less robust risk management.
Larger banks typically have more established relationships with highly sophisticated investors such as private credit market participants as well as a more robust infrastructure for controlling the associated risks.
