U.S. bank CEO: "Private credit is growing too fast… 'warning lights' are on"

Lack of liquidity backstop for nonbank lenders pointed out

"Growth pressure is increasing, market risk may spread"

Harris Simmons, CEO of mid-sized U.S. regional bank Zions Bancorp, warned that a yellow signal has been lit over the rapid expansion of the private credit (Private Credit) market.

On the 21st (local time) during an earnings conference call, Simmons said, "If there is the risk that worries me most these days, it is the private credit sector," adding, "Growth and expansion at such a rapid pace could lead to future defaults."

"Nonbank lenders have no liquidity backstop"

Simmons specifically warned, "If the private credit sector faces stress, such as a liquidity crunch or problem loans, the ripple effects could be large," and pointed out, "Nonbank lenders do not have a structural liquidity safety net like the U.S. central bank (the Fed)."

The liquidity safety net referred to here means a system in which banks can receive short-term funds from the central bank in a crisis. By contrast, private credit managers do not receive such support, so if a credit squeeze occurs it is difficult for them to stop it on their own.

Recent credit incidents… "There is never just one cockroach"

Zions' stock plunged last week. It was shortly after Zions disclosed that it had been defrauded after extending loans to a fund that invests in distressed commercial mortgages (real estate-secured loans). Earlier, the bankruptcies of subprime auto lender Tricolor Holdings and auto parts maker First Brands Group followed, spreading anxiety across the credit market.

Jamie Dimon, CEO of JPMorgan Chase, also last week warned of potential hidden defaults, saying, "There is never just one cockroach." The remark was interpreted as targeting the private credit industry, and in response Blue Owl Capital co-CEO Marc Lipschultz retorted, "Banks should look at their own balance sheets first."

"The growth treadmill is hard to stop"

Simmons said, "There are certainly responsible lenders in the private credit market, but at the same time the pressure of 'being unable to stop growing' is intensifying."

He said, "Once you get on the growth treadmill, it is not easy to get off," expressing concern that "the ongoing pressure to expand returns could eventually lead to loosening lending standards or a reduction in risk controls."

New York=Shin-young Park, correspondent nyusos@hankyung.com