US Federal Reserve Governor Michael Barr warned that stress in the fast-growing private credit market could lead to a “psychological contagion” and spill over into the broader financial system, Reuters reported, citing an interview with Bloomberg News.Barr said direct links between banks and private credit companies did not currently appear to be a “serious concern”, but other areas such as the insurance sector’s exposure to private lenders remained a concern.“People might look at private credit, and instead of saying: ‘This is an individual problem, these were subprime loans, the rest of the corporate sector is different’, they might say: ‘Wow, there seem to be cracks in our corporate sector.
Maybe here in the corporate bond market, there are also cracks, Barr said.“Then you could have a credit decline, and that could lead to more financial stress,” he added.Private credit companies have come under pressure during the recent market downturn, with some investors pulling back amid concerns about valuations and lending standards in the wake of several high-profile bankruptcies.The comments come as regulators increasingly monitor the rapid expansion of private lending markets, which have grown as an alternative source of financing outside traditional banking channels.Federal Reserve Chairman Jerome Powell said in March that policymakers were monitoring developments in the private credit sector for signs of stress, but did not currently see risks significant enough to threaten the broader financial system.