Risky lending by “shadow banks” threatens to trigger a new financial crisis, the International Monetary Fund (IMF) has warned.
The Washington-based organisation said there were “systemic risks” posed by the $2.1 trillion “opaque world of private credit”, which has boomed in recent years against a backdrop of record low interest rates.
Companies deemed too large or risky for commercial banks and too small to float their shares on the stock market have increasingly turned to non-bank funds to borrow money quickly, flexibly and confidentially.
However, regulation in this corner of financial markets is relatively lax and the IMF said a severe economic downturn could quickly expose vulnerabilities.
“In a severe downturn, credit quality could deteriorate sharply, spurring defaults and significant losses,” the IMF said in its latest Financial Stability Report.
The impact would be felt beyond just private lenders as a growing share of public and private pension funds are pouring money into these private funds.
The IMF’s warning comes just weeks after the Bank of England launched a review into financial stability risks posed by private equity.
Threadneedle Street is concerned about the value of assets controlled by private equity companies, how much money has been lent against them and how these loans are linked back to commercial banks and investors.
Some of Britain’s biggest companies are now backed by the private equity industry, including the supermarkets Asda and Morrisons.
While private credit differs from private equity, the IMF noted that “growth in private credit has followed the rise in private equity”.
It said private equity firms were involved in around 70pc of private credit deals. Some of the biggest “shadow bank” lenders include funds run by Apollo, Blackstone, KKR and Carlyle Group, which have driven some of the biggest private equity deals over the past decade.
