Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, believes that the rapid expansion of the private credit market might reduce systemic risk in the US financial system, despite limited political support for raising bank capital requirements.
The report quotes Kashkari as saying in Busnos Aires on Monday that: “It’s concerning on one level, given how quickly it has grown, but when I look closely, a large US bank today operates with leverage of around 10 to 1 – ten times as many assets relative to equity. In contrast, these private credit vehicles typically have a 1 to 1 leverage, meaning much less risk.”
Kashkari also highlighted that private credit vehicles might carry less risk because they generally lock in capital for longer periods, whereas banks must provide overnight liquidity.
“Systemic risk often arises from the combination of leverage and maturity transformation,” he said. “In both these areas, private credit vehicles seem to pose much lower risk than banks.”
While Kashkari expressed a desire for tighter bank regulations, he said he is “cautiously optimistic” that the growth of the private credit market could help reduce overall systemic risk.