Warren Demands Private Credit Stress Test After Big Bankruptcies

US Senator Elizabeth Warren is urging regulators to scrutinize the burgeoning private credit market, warning that implosions of Tricolor Holdings and First Brands Group are “likely the tip of the iceberg” in terms of bad debt held by Wall Street’s biggest banks.

In a Thursday letter, Warren and Senator Jack Reed demanded that top cops at the Federal Reserve and Federal Deposit Insurance Corporation push Treasury Secretary Scott Bessent to conduct a stress test that evaluates the “the size, scale, scope, interconnectedness, and mix of activities of the private credit market” in the US.

The $1.7 trillion private credit industry, where deals can close faster and with looser terms than traditional bank lending, has drawn concerns that it’s introducing new layers of risk in the financial system.

“Over the past few months, large banks have reported more than a billion dollars of losses on just a handful of poorly underwritten commercial loans,” said the letter addressed to chief watchdogs including Michelle Bowman, the Fed’s Vice Chair for Supervision.

“We are deeply concerned that your agencies are making the banking system more fragile, at the exact moment you should be strengthening it.”

The senators also urged the agencies to review credit risks at all banks with at least $50 billion in assets, “with a special emphasis on loans to private credit firms and other non-bank financial institutions.”

US lawmakers aren’t alone in raising concerns over emerging cracks in credit markets and the growth of non-bank lending. Earlier this week, the Bank of England launched a test to understand how a blow up in private markets would reverberate across the wider financial system, with asset management giants Blackstone Inc., Apollo Global Management Inc., and KKR & Co Inc participating in the test.

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