Proliferation of private credit raises fears of looming financial crisis

"When companies need a loan, traditionally, they turn to a bank. But increasingly, they are turning to financial firms that are not really banks but do have a lot of cash. This is the private credit market. It has exploded in the past 15 years. It's now valued at around $2 trillion. Natasha Sarin is president of the Yale Budget Lab, and she argues that these private credit firms are making risky loans - so risky they have got her thinking about the 2008 financial crisis."

"So the cockroach I can't take credit for because it comes from Jamie Dimon, the CEO of JPMorgan Chase, as he was commenting on something that many of us who aren't deep in the finance industry may have even missed over the course of the last many weeks, which is that two auto-related firms went bankrupt over the course of a few weeks in September."

Private credit has grown rapidly to roughly $2 trillion over the past 15 years. Companies increasingly borrow from nonbank financial firms that hold large pools of cash. These private credit firms are making risky loans that can be opaque and hidden even from investors. Recent bankruptcies of two auto-related firms revealed larger and more opaque borrowing than previously understood. Borrowing occurred through traditional banks, public markets, and less transparent channels. The scale and opacity of private credit raise concerns about contagion and broader financial-system fragility similar to the 2008 crisis.

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