Excerpt
June 2025, Paper: "The private credit market has rapidly expanded in recent years, becoming an established source of corporate loans to middle-market firms, a key financing tool for private equity transactions, and a testing ground for new lending strategies. Private credit has thus grown in systemic importance as it takes on a larger role in corporate finance and develops linkages across the financial system while remaining less transparent, less liquid, and more reliant on structures that make its risks more difficult to evaluate than those of other types of credit intermediaries. The growing interconnectedness between private credit funds and other financial institutions can amplify financial instability, as evidenced by higher correlation and network connectivity during stress. While the scale of private credit is still small and fund leverage appears modest, the direction of travel points toward growing systemic importance as it expands beyond middle-market orporate lending and begins to tap public market funding. Regulators and central banks should thus consider expanding the regulatory perimeter to include significant private credit funds and to monitor risk concentrations, including leverage and liquidity mismatches. Transparency and data gaps must be addressed through improved reporting requirements for private credit funds and borrowers, enabling better monitoring of exposures and interconnectedness. Macroprudential policies should carefully consider private credit dynamics, such as accounting for rapid nonbank credit growth when setting countercyclical buffers and ensuring central banks are prepared to manage liquidity or credit crunches that could emanate from stress in private credit markets. These measures can help mitigate systemic risks while ensuring the benefits of this growing source of credit. In this paper, we explore the world of private credit in greater depth, assess the extent of its interconnectedness in the financial system using well-known reduced-form econometric measures of systemic risk, and conclude with policy implications and recommendations."