IMF warns of credit growth

The International Monetary Fund (IMF) has released the analytical chapters of its World Economic Outlook and Global Financial Stability reports. The relevant section of the Global Financial Stability Report assessed the vulnerabilities in the rapidly growing corporate private credit sector and the potential risks to financial stability.

The report stated that private credit provides significant economic benefits by offering long-term financing to firms that are too large or risky for banks, yet too small for public markets; however, it noted that firms receiving private credit tend to be smaller and riskier than their counterparts in public markets.

Pointing out that assessing overall financial stability risks of private credit is difficult due to the lack of necessary data, the report noted that despite these limitations, such risks currently appear to be under control.

The report emphasized that given the size of private credit and its role in credit creation, it could become macro-critical and amplify negative shocks to the economy.

RECOMMENDATION ISSUED

The report recommended that authorities encourage a more intrusive supervisory and regulatory approach toward private credit funds, their institutional investors, and leverage providers.

It advised closing data gaps and improving reporting requirements to allow for a more comprehensive assessment of risks, and called for close monitoring of liquidity.

Furthermore, in a blog post written by IMF officials on the subject, it was emphasized that the rapidly growing private credit market needs to be monitored more closely, stating, "The rapid growth of this opaque and highly interconnected part of the financial system could increase financial vulnerabilities, given its limited oversight."

The post noted that the private credit market, where specialized non-bank financial institutions such as investment funds lend to corporate borrowers, exceeded $2.1 trillion globally last year in terms of assets and committed capital, with approximately three-quarters of this located in the US.

SOME ECONOMIES HAVE SLOWED

On the other hand, the released section of the World Economic Outlook report also recalled that central banks around the world have significantly increased policy interest rates over the last two years.

The report stated that while higher interest rates were expected to lead to a slowdown or even a recession, global growth has remained stable, though it noted that some economies have slowed down.

The report examined the effects of monetary policy across countries and over time through mortgage and housing markets.

Pointing out that changes in mortgage and housing markets since the global financial crisis and during the COVID-19 pandemic may have limited the impact of the high policy interest rates seen so far in many countries, the report emphasized that the longer rates are kept high, the more likely it is that households, which have been relatively protected until now, will feel the strain.