Australia's banking regulator to conduct stress tests on private credit risks

Australia's banking regulator intends to stress test the nation's financial sector to gain a better understanding of the impact of private credit capital flows on other segments of the market.

"Private credit is a new and emerging risk that we are looking at," said John Lonsdale, chair of the Australian Prudential Regulation Authority (APRA), at a media conference in Sydney on Wednesday. "We want to work on more transparency in this area and we've signalled that already there is quite a lot of opaqueness."

Private credit is one of the fastest-growing sectors in financial markets at the moment, with this investment class being viewed as an alternative to the bond and loan markets, where banks typically serve as intermediaries. APRA plans to conduct a cross-industry stress test to examine "the linkages between the different sectors and how private credit might flow," Lonsdale explained.

The agency is joining forces with the Australian Securities and Investments Commission to increase scrutiny on private markets as more regulatory guardrails are being implemented elsewhere to handle potential risks. Private credit constituted over 10 per cent of Australia's A$1.4 trillion ($950 billion) corporate debt market in 2023, according to restructuring firm Alvarez & Marsal Inc., a proportion Lonsdale describes as "significant."

APRA is also examining "strategic asset allocation" and the exposure that Australia's A$4 trillion pension pool has to private credit. Opportunities in Australian private credit were previously mostly limited to super and pension funds due to high entry barriers, but they are now becoming more accessible to individual investors, according to wealth management firm JBWere earlier this month.

Potential risks are "being discussed in international forums," Lonsdale noted. "We attend the Basel Committee, and it's an issue being looked at there. The same can be said at the Financial Stability Board."