New York Fed visits big banks to review private-credit loan exposure

The New York Fed has been visiting big banks to review their loans to private-credit firms and to understand their exposure, with officials going into JPMorgan, Wells Fargo, Barclays and Morgan Stanley since spring and asking about overall exposure and risk². Semafor said the Fed is looking into Morgan Stanley, Barclays and other banks’ valuations of private-credit loans, with questions about exposure, risk management and collateral quality³.

The review follows loan markdowns at JPMorgan¹. Coverage of the review noted that it lands while broader risk assets look complacent compared with the stress visible in sovereign bonds¹.

The list of institutions is specific. Officials have gone into JPMorgan, Wells Fargo, Barclays and Morgan Stanley since spring², and Semafor named Morgan Stanley and Barclays among the banks whose private-credit loan valuations are under review³. The questions put to them cover exposure, risk management and collateral quality³.

Why it matters to investors

The supervisory questions are about marks, not just size. Collateral quality and valuation practice are what determine whether a reported exposure is the real exposure³, and markdowns at one lender are the kind of event that makes supervisors ask the same question of its peers¹.

There are signs of pressure on the fund side as well. A KKR private-credit fund exceeded its 5% redemption cap to meet investor withdrawals, with KKR saying the excess was modest and that the fund had sufficient liquidity to accommodate all withdrawals⁴. One analyst argued more broadly that private credit, exemplified by Blue Owl Capital, is under stress from record defaults, questionable loan valuations and significant redemption pressure⁵.

What to watch

The link to rates is the reason this is a market story rather than a supervisory one. A Morningstar market discussion put US ten-year yields at about 5.3% last week and argued that a lot looks to be priced into the long end of the yield curve⁶. Private credit is floating-rate lending to leveraged borrowers, so the level of rates and the quality of marks are the same question seen from two sides.

Watch for further markdowns at the named banks^1,2, for redemption caps being breached at other funds after the KKR episode⁴, and for whether the complacency in risk assets that the review highlighted starts to close toward the stress in sovereign bonds^1,6.

Collateral quality is the variable that connects the two halves of this story. It determines both what a bank can recover on a loan to a private-credit firm³ and what a fund can realise when investors ask for their money back⁴. One analysis argued that record defaults and questionable loan valuations are already visible in the sector⁵.