The International Monetary Fund (IMF) is encouraging regulators around the world to more intrusively regulate private credit funds, the institutions that invest in these funds and the institutions that provide leverage to these funds.

The IMF notes that private credit is now a $2 trillion+ market, and it has the potential to create systemic risks for the global financial system.

In particular, the IMF is sounding an early alarm on the risk of issues for the economy if the private credit markets seize up because of a crisis. Private credit is approaching the market size of the syndicated loan and high yield bond markets in the US – making it a significant part of the country’s financial infrastructure. The worry is that if the market stopped lending, there would not be enough other infrastructure in place to quickly take its place and extend credit to companies. This would then have follow-on economic and employment consequences.

The IMF works through this in detail in their 2024 Global Financial Stability Report. They look at potential systemic risks in the private credit markets – including the interconnectedness of investors, the multi-level layers of leverage in the market, and stale valuations because of a lack of market prices. In light of these risks, the IMF is particularly concerned about the opacity of the market – meaning that regulators have “severe data gaps” (within and across borders). This could in turn prevent them from pre-empting a crisis.

The IMF also talks in the report to the value that the Private Credit markets bring to the economy and the financial system. So their recommendations are for greater data gathering and regulation, rather than trying to dissolve the market. The IMF recommends that regulators take a more intrusive approach. Covering credit funds themselves, their investors and their leverage providers. This includes better data gathering, watching for investor concentrations, monitoring liquidity and conduct risks, and increasing cross-border cooperation with other regulators.