Federal Reserve Kashkari: Private Credit May Reduce Systemic Risks

The Zhitong Finance App learned that the Minneapolis Federal Reserve Chairman Neel Kashkari (Neel Kashkari) said that although the US government lacks the will to raise banks' capital requirements, the rise of the private credit market may reduce systemic risks in the US financial system.

Kashkari said, “This is scary to a certain extent because it is rapidly growing to a market size of more than a trillion dollars. But according to my research, today a bank in the US — a large bank — has a leverage ratio of about 10 to 1, 10 times its share capital assets. The leverage ratio of these private credit instruments is usually 1 to 1, so the leverage ratio is much lower.”

Private credit — generally referred to as loans from non-bank institutions — has been soaring over the past few years. In an environment of rising interest rates, private credit offers investors more attractive returns compared to other fixed income products. It has become an alternative source of funding for borrowers, removing many of the more stringent requirements typical of bank loans.

Kashkari said private credit instruments may also present less risk because private credit instruments usually lock in capital for a longer period of time compared to banks that need to provide overnight liquidity. He added, “So where does the systemic risk come from? The intersection between leverage and term conversion. Therefore, from these two aspects, these private credit instruments appear to be much less risky than banks.” “Although I would like us to have stricter regulation of banks, in reality I am cautiously optimistic that some developments in the market may reduce the risk of the financial system, or at least reduce systemic risk.”