May 3 (Reuters) – U.S. Federal Reserve Governor Michael Barr said stress in private credit could spark “psychological contagion” leading to a broader credit crunch, Bloomberg News reported on Sunday.
While direct links between banks and private credit do not yet appear “super worrisome,” there were other areas of concern such as the insurance sector’s overlaps with private lenders, Barr said in an interview with Bloomberg News.
“People might look at private credit, and instead of saying, ‘This is an idiosyncratic problem, these were high-risk loans, the rest of the corporate sector is different,’ they might say, ‘Wow, there seem to be cracks in our corporate sector. Maybe over here in the corporate bond market, there are also cracks,'” Barr said.
Barr also added that “then you could have a credit pullback, and that could lead to more financial strain.”
Private credit firms have been under stress because of the market’s recent downturn with some investors retreating from these investments due to worries about valuations and lending standards following a handful of high-profile bankruptcies.
Fed Chair Jerome Powell said in March central bank officials are watching developments in the private credit sector for signs of trouble, but do not currently see issues there bringing down the financial system as a whole.
(Reporting by Angela Christy in Bengaluru; Editing by Will Dunham)
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