In recent years, the asset class has been a strong source of returns for fixed-income investors and wealth managers. 

We put it all out there in March, as a finews.asia piece from then shows. 

At the time, private banks and wealth managers remained bullish that the skyrocketing growth in private credit would continue even though some were also predicting pressures from declining base rates and competition from traditional lenders.

Better Visibility

Something, however, that no one could see coming was scrutiny from the Financial Stability Oversight Council, as a readout published on Friday highlights.

During an executive session, Treasury staff and Council member agencies looked at the efforts underway to provide «better visibility» over non-bank and direct lending, both segments that have benefited from investors chasing yields and returns.

No Transparency

«Council members noted that the current lack of transparency in the private credit market can make it challenging for regulators to fully assess the buildup of risks in the sector, and discussed member agencies’ efforts to enhance monitoring of this market,» the Treasury indicated.

At this point, although it is too early to tell what the consequences of closer scrutiny are even though a larger factor may already be out there having a deeper impact on activity. When we published our piece earlier in the year, we forecast a decline in base rights would weigh down the market.

STIVs in the Crosshairs

That has since become a fact with the Federal Reserve’s 50 basis point cut in September, and that, along with the higher visibility with officials, could be a substantial dampener.

The council also seemed to be taking a harder look at so-called Short-Term Investment Vehicles (STIVs), the current acronym du jour that looks to be joining the pantheon of non-banking entities such as SIVs (Structured Investment Vehicles), and VIEs (Variable Interest Entity).

Prior Stress Events

The Treasury indicated that STIVs had increased assets under management in recent years and had become a significant source of funding in «critical» short-term markets.

«The Council discussed the performance of STIVs during prior stress events and the ongoing efforts of financial regulators to enhance the resilience of short-term funding markets,» they indicated.