- Key insight: Recent news reports about the struggles of Blue Owl Capital raise real concerns about opaque private credit firms and the risks they may pose to the broader financial markets. The government needs the tools to gather more information.
- What's at stake: Recent reporting on private credit points to questions around credit performance in certain sectors, pressures related to investor liquidity, and ongoing challenges in valuation and transparency.
- Forward look: The point is to recognize familiar and worrisome conditions as soon as possible when they begin to emerge. It would give the government a new and useful tool that could lessen both the risk and impact of a systemic event.
Many in the financial services industry, myself included, believe that regulation and supervision should apply to all financial services players on a level playing field. I have
This viewpoint is often justified on the basis of fairness, ensuring that compliance and other regulatory burdens are distributed evenly and do not create distortions in the marketplace. But the issue goes well beyond fairness. When firms without bank-hardened control systems operate in the same lines of business as regulated banks, they contribute to a less stable financial system overall. At the same time, they can pressure regulated firms to stretch their own practices in order to compete, potentially eroding standards across the market.
It does not take much imagination to appreciate just how serious these dynamics can become. The financial crisis of 2007 is but one example of how such imbalances, left unchecked, can contribute to systemic risk.
Recent reporting on private credit markets points to a set of familiar concerns: questions around credit performance in certain sectors, pressures related to investor liquidity, and ongoing challenges in valuation and transparency. Official commentary has begun to reflect similar themes. The Financial Stability Board, for example, has highlighted a range of emerging vulnerabilities and the need for more consistent monitoring and supervisory engagement — an acknowledgment that these risks are not isolated but reflect how the market itself has developed.
Recent press surrounding Blue Owl Capital provides a useful illustration of how these issues can manifest in practice. But it is only one of many firms operating in
By most accounts, many firms in this sector, including Blue Owl, sit squarely within the areas of the private credit market that are now showing signs of stress. These firms may or may not be in trouble, but we do not know. In many cases, a lack of transparency exacerbates problems that extend beyond any single institution.
It is sometimes argued that, because private credit firms are not FDIC-insured, any risk is limited to their wealthy investors. That may or may not be the case. Directly or indirectly, less well-capitalized individuals may also be affected, whether through pooled investments or other channels. In addition, there is typically some degree of interconnectedness between nonbank lenders and the banking sector, whether through bank holding company investments and lending relationships or by reason of broader market disruptions that affect bank customers more generally.
Large private credit platforms are now coming under increased scrutiny, not only over credit performance in certain sectors but also over how liquidity is managed, how assets are valued, and how much visibility counterparties and regulators actually have into these practices. But the private credit market, almost by definition, lacks the layer of ongoing examination that applies to banks. That examination, while not perfect, at the very least provides a lens into what is going on and gives federal authorities a greater ability to act, both to protect the banking sector and/or avoid systemic risk.
The Treasury Department held a high-stakes huddle with state insurance officials to discuss risks associated with the rapid growth of private credit in the economy and whether those investments could pose systemic vulnerabilities.
A halfway house suggests itself. Even where nonbank financial entities, such as Blue Owl, are not subject to the full scope of the bank regulatory regime, Congress or the states could require some form of periodic examination. This would have real value. At a minimum, it would likely surface weaknesses earlier than would otherwise be the case. That earlier visibility, in turn, would not necessarily ensure safer or more compliant behavior, but it would give regulators and market participants clearer and timelier signals of emerging problems. In many cases, that alone can reduce downstream harm to counterparties and/or the stability of the system.
This is an area where constructive legislation could play a useful role. Greater transparency — at least with respect to larger, currently nonregulated financial institutions — would be beneficial and could be implemented in ways that do not impose undue burden or unnecessary intrusion. Even without new legislation, bank regulators could arguably undertake some level of examination where an entity such as those described above functions as a service provider to banks. Such an approach would not reach all nonregulated institutions, but it would likely capture a meaningful portion of the largest and most interconnected firms.
And this kind of periodic examination need not be limited to bank regulators. Securities and futures regulators, as well as those responsible for anti-money laundering and consumer protection, may also have roles to play. It is at least arguable that some of these authorities already have jurisdiction over firms in this space. In practice, however, that jurisdiction does not appear to be exercised as actively as it might be, and more consistent use of those authorities would, in my view, be warranted.
Blue Owl is simply one example and not necessarily the most compelling one. There are undoubtedly other nonregulated financial institutions that could serve as equal or better illustrations of where increased transparency would benefit markets, businesses and individuals alike.
The point is to recognize familiar and worrisome conditions as soon as possible when they begin to emerge. Will this avoid a mini or maxi 2007? Perhaps or perhaps not. But it would give the government a new and useful tool that could lessen both the risk and impact of a systemic event.
