Growth in private credit offers opportunities but requires vigilance
by Ralph Verhoeks en Annick van Ool, work as economists in the Financial Stability division of De Nederlandsche Bank (DNB).
Private credit worldwide
In recent decades, the global market for private credit has grown strongly, from about $0.2 trillion in 2000 to more than $2.5 trillion today. The United States is clearly at the forefront of this development, accounting for roughly half of the total private credit market and an annual growth rate of 20% (see Figure 1). In both the US and Europe, the market for private credit is now comparable in size to the market for leveraged loans and high-yield bonds. Research by the BIS shows that an increasingly diverse range of companies and sectors are also making use of this form of financing. Despite the rapid growth, private credit is still a relatively small part of lending to companies. In the US, it accounts for around 7% of lending, in Europe around 2%.
Why is private credit growing?
The growth of private credit is partly due to the tightening of capital requirements for banks following the lessons learned from the financial crisis. For risky loans and investments, banks need to hold more capital. As a result, banks are more selective in their lending and less willing to lend to companies with a riskier profile, especially for longer maturities. Private credit has partly filled the gap that has arisen after this retreat of banks. In addition, the possibility of more customization plays a role in the growth of private credit. Whereas private credit was traditionally mainly used by small and mediumsized companies, it is increasingly being adopted by larger companies to better meet their specific financing needs. The period of prolonged low interest rates has also contributed to the growth.
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