WASHINGTON—A senior Federal Reserve official is warning that strains in the fast-growing private credit market could spill over into the broader financial system if investor sentiment turns sharply negative.
Michael Barr, vice chair for supervision at the Federal Reserve, said stress in private credit could trigger “psychological contagion” that amplifies market fears and tightens lending conditions beyond the sector, according to a Bloomberg News report.
Barr cautioned that while private credit has expanded rapidly as banks pulled back from certain types of lending, the relative opacity of the market and its reliance on investor confidence could make it vulnerable during periods of economic stress.
The comments underscore growing attention among regulators to nonbank lending channels, which have become a larger source of financing for middle-market companies but remain less regulated than traditional banking—raising concerns about how shocks could transmit through the system if conditions deteriorate.