Bank of Canada keeps close eye on private credit as exposure hits $500 billion
By Aboki Forex —
The Bank of Canada is watching the rise of private credit, a lending model that leaves Canadian investors and banks exposed to half a trillion dollars in loans largely outside the public eye. The central bank flagged the sector as a risk in its May financial stability report and released a paper last week explaining why it matters.
Private credit broadly means businesses borrowing from non-bank lenders such as asset managers, insurers and pension funds. A mid-sized company might use it to fund growth when it is too small for a traditional bank loan or a bond market issue.
Canadian exposure is mostly in the US
As of the start of this year, the Bank of Canada estimates that Canadian investors and banks had a combined $500 billion in private lending exposure. Most of that activity is in the United States, where rapid adoption of private credit has been linked to high-profile bankruptcies.
The share of Canadian businesses using private credit remains limited. The central bank's paper found that loans from non-banks to domestic businesses held steady at about 15 per cent over the past decade. That suggests, in the authors' words, "private credit has not been displacing traditional sources of funding."
Who is lending and who is at risk
Canadian firms are not taking out these loans in large numbers, but many are underwriting them. Private lending in Canada comes mainly from life insurers, pension funds and asset managers. Banks are also exposed by lending to funds active in the private credit space.
The Bank of Canada notes that insurers and pension funds are stable investors in the market. Domestic asset managers are a "small but growing" segment. Banks' exposures to private lending are considered relatively low-risk.
In its May financial stability report, the central bank deemed private credit risks "manageable." But monetary policymakers still think the space is worth watching as global uptake expands quickly and firms seek fast, flexible access to capital.