Hybrid event.

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Zoom URL: https://uni-frankfurt.zoom-x.de/j/65250603111?pwd=sgjfAYO5y90T0gwW12zXym16snxyBx.1
Meeting ID: 652 5060 3111
Password: 419785

Abstract:

Private credit is an exponentially growing market that is defined, roughly, as companies structured like private equity firms that provide a range of credit products to corporations.  Proponents claim that private credit's $2 trillion growth is a result of miraculous returns on super-safe loans, while detractors point to warning flags.  To date, however, warnings about private credit have all taken the form of vague possibilities. This article aims to change that through three contributions. First, I work to build the most comprehensive, although still imprecise, estimates of the size and leverage of the private credit market and the extent of exposure of banks and insurance companies to that market. Second, I conduct a structural analysis of the private credit market to reveal ways that it may pose more risks than initially meets the eye. For instance, I document previously unidentified liquidity risks to the private credit sector, and I discuss ways that key private credit investments, such as junior tranches in Collateralized Loan Obligations, Synthetic Risk Transfers, and Unitranche loans concentrate first-loss risk in the private credit industry.  I also highlight circularity dangers that can come when banks buy credit insurance from the same private credit firms they are lending to.  Finally, I run simulations using detailed data on hundreds of thousands of prior corporate loans to estimate the probability and potential severity of problems that private credit could cause to the broader financial system.  While imprecise, these estimates provide a first ballpark estimate of potential risks from private credit. I conclude with policy recommendations. I argue against drastic action to stop private credit. Nevertheless, my analyses highlight urgent needs to make banks and insurance companies more resilient to potential losses.