The central bank has begun collecting data from banks to get a better idea of how their funding is being used in private credit, Michelle Bowman, the Fed’s vice chair for supervision, told lawmakers.
The Federal Reserve has launched a new data-collection effort intended to provide more transparency on banks’ lending to the private credit sector, the central bank’s vice chair for supervision, Michelle Bowman, said Thursday.
Bowman, who was among several regulators to testify Thursday to the House Financial Services Committee, noted the data collection as some lawmakers expressed concern over a lack of information on banks’ exposure to the private credit market.
Rep. Ritchie Torres, D-NY, asked Bowman whether an April letter the Fed sent to U.S. banks inquiring about their financial exposure to private credit was “an admission that the Federal Reserve has insufficient visibility” into the full extent of the issue.
And Rep. Juan Vargas, D-CA, expressed concerns about the interconnectedness between private credit and the rest of the financial system, and the “gap in data” that surrounds it.
Bowman said “a number of opacities” exist between bank involvement and where funding ends up in the nonbank space.
“This is an important issue that we’ve been looking very deeply into and trying to work with our regulated financial institutions to get a better sense of what the bank investment is into the private credit space,” she said. “Since it’s quite opaque, it’s difficult to know.”
The Fed introduced the data-collection effort last month “to understand exactly where those investments are going outside of the banking system,” Bowman said.
That should afford more transparency and specificity on how bank funding is being used in the private credit space, she said, adding it hopefully will “provide us with a much better view on where the vulnerabilities might lie.”
“We have seen a rise in the investment from banks into NBFIs in particular, but it’s been very difficult for us to have a clear understanding of where those funds have been flowing,” she said.
Moody’s has estimated U.S. banks’ private credit exposure is about $300 billion, as part of more than $1.2 trillion in loans extended to non-depository financial institutions broadly. The private credit market is about $2 trillion globally, the Financial Stability Board said last month.
When Vargas pressed Bowman on whether private credit poses a problem, given the mushrooming size of that market, she said it’s still a “very small proportion of the lending categories within the banking system.”
“But it is something that we need to know more about because it’s very opaque, which is exactly why we’re asking for more information from our regulated institutions,” she added.
Bowman referenced “bankruptcies and challenges last fall with several private credit funds,” due to poor collateral management, fraud or lack of clear disclosures.
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