Stress in US private credit markets is unlikely to trigger a broader liquidity crisis across the financial system, although indirect transmission risks are increasing as the sector becomes more interconnected with traditional finance, according to Deborah Cunningham, CIO of Global Liquidity Markets at Federated Hermes.
Writing in a Reuters commentary piece, Cunningham said concerns around private credit contagion remain contained for now, particularly given the resilience of money market funds and the strong capital positions of major US banks. Cunningham noted that private credit exposure within money market funds remains limited given the illiquid nature of the asset class. She added that large banks continue to maintain strong liquidity, and capital ratios well above regulatory minimums.
However, she warned that indirect risks linked to the rapid expansion of private credit markets should not be overlooked. Bank lending to non-depository financial institutions, including private credit funds and other non-bank lenders, has risen sharply to nearly $2tn, according to Federal Reserve data.
Cunningham said these growing balance sheet linkages increase the potential for stress in private credit markets to feed back into the banking system through funding structures and receivables exposure.
She also highlighted structured finance markets as another area of potential vulnerability, noting that certain asset-backed securities may contain indirect exposure to private lending activity, making underlying risks harder to identify during periods of market stress.
She said that improved disclosure around banks’ exposure to private credit markets would help investors better assess evolving risks as private market financing continues to expand across the financial system.
