Fed Panelists Wish Private Credit Was More Public

"For me, the most pressing regulatory issue is this major push to get 401(k) money into private credits," de Fontenay said. "If you have truly found a moneymaking machine, the last thing you want to do is share it, right? And so the fact that [asset managers] are so desperate right now to share it suggests that maybe they're excited to, you know, earn some extra fees by managing other people's money. But it also suggests that they might really just be having a hard time offloading these assets and doing anything with these assets."

What it means: Some of the financial markets watchers helping regulators watch for problems fear that weak private credit disclosure rules could be a problem.

The conference: The Atlanta Fed organizes a financial markets conference every year, and speakers often talk about potential threats that eventually leave market watchers' risk radar screen.

Speakers on some of this year's conference panels argued that concerns about private assets players are overblown.

David Scharfstein, a Harvard University finance professor, made the case that one closely watched type of private credit provider, the business development company, appears to attract companies with high capital levels that pose little risk to banks.

But de Fontenay and the speakers who shared the stage with her for the conference session on the rise of nonbanks in the credit markets were gloomier, in part because they are skeptical about the idea that traditional bank regulators can see what the private credit providers and their credit recipients are doing.

"You're not getting mandatory disclosure from the company about itself on an ongoing basis," de Fontenay said. "You're not getting mandatory disclosure when the equities are issued. You're not getting mandatory disclosure when the debt is issued. You're not getting trading prices. To the extent that spreads to a larger section of the economy, then this creates big risks for the economy."

Some asset managers are forming relationships with life insurers. The life insurers are investing more heavily in private equity and private credit.

De Fontenay said she is interested in the relationships between life insurers and private credit players.

That connection "is a risk and worth looking at more closely," de Fontenay said. "There is some preliminary research that [insurers] are taking much more junior positions in their lending than banks are."

Ana Arsov, who is now the chief investment officer at Bright Fame Holding and a member of the TD board, worked for Moody's from 2013 through February. She recalled seeing results from a survey of big life insurers.

Because of regulatory differences, nontraditional securitized assets made up 16% of the balance sheets at the life insurers surveyed, compared with 8% at the European life insurers and 1% at life insurers in Japan, Arsov said.

Private credit up close: Arsov got to see private credit deals up close because she was global head of private credit at Moody's from November 2023 until she left the company.

Traditionally, private credit arrangements have involved small, privately held companies without credit ratings.

Broadly syndicated loans have involved players that are registered with the U.S. Securities and Exchange Commission and have ratings from major credit rating agencies.

When Arsov saw the private credit deals, the credit terms for the smaller private credit recipients tended to be tighter than the terms for the companies using broadly syndicated loans, but the terms for big private credit recipients were comparable to those for broadly syndicated loans, Arsov said.

Names: Nicola Cetorelli, head of financial intermediation at the Federal Reserve Bank of New York, said asset managers that want to put private credit arrangements in pools inside ETFs and retail investment funds might end up causing the disclosure standards for private credit arrangements to converge with those for other types of credit arrangements.

Eventually, Cetorelli said, the private credit providers will want and need access to the facilities that the Federal Reserve banks use to get commercial banks through short periods when financial markets freeze.

"Across countries and over time, I give you these privileges, but, in return, you have to give me some access to what it is that you're doing," Cetorelli said.

If private credit providers provide loans, and they also give the cash providers the ability to pull cash out, "I call that a bank," Cetorelli said.

If regulators are supposed to apply rules to risky activities, not to risky companies, "then we have to call activities by the right name," Cetorelli said.

The Fed official: One of the conference speakers was Fed Vice Chair Philip Jefferson.

Jefferson said the Fed wants to keep the economy working and also wants to see the intermediaries that move credit and cash through the financial system doing their best to keep the economy working.

"It is vital for a central bank to make clear that it stands ready to provide liquidity should stress emerge," Jefferson said. "But a central bank must also take steps to minimize moral hazard. 'Moral hazard' in this context refers to the concern that publicly provided liquidity might encourage private financial institutions to take on excessive risk."

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