ECB says private-credit fuelled AI boom poses risk to financial system

{"text":[[{"start":8.3,"text":"An AI-fuelled investment boom increasingly financed by private credit would create a new threat to the euro area’s financial system, especially its insurers and pension funds, the European Central Bank has warned."}],[{"start":21.05,"text":"The ECB said in a report on Tuesday that if private credit continued to grow rapidly as a source of funding for AI companies and data centres, investors in the region could be left exposed to losses resulting from disappointment in the technology’s potential."}],[{"start":36.85,"text":"“If exposures grew rapidly and expected AI-related cash flows disappointed, private credit could become a more material source of credit risk and a potential amplifier of stress for euro area financial institutions,” the central bank said in an extract from its financial stability review."}],[{"start":54.95,"text":"The ECB study simulated a “severe shock” to global private credit markets and found that there would be “limited” direct losses to Eurozone financial institutions. But it warned that “broader spillovers would be larger”, particularly for insurers and pension funds."}],[{"start":70.5,"text":"“Insurance corporations and pension funds in particular could, in an adverse scenario, face more material second-round revaluation losses from broader spillovers to leveraged loans, high-yield bonds and equities,” it said."}],[{"start":84,"text":"The central bank said its stress scenario included the impact of losses from private credit funds and leveraged loans, as well as a sell-off in public equity and high-yield bond markets. "}],[{"start":96.6,"text":"It estimated that Eurozone pension funds would suffer losses in such a scenario worth between 5 and 6 per cent of their total assets, compared with about 4 per cent for insurers."}],[{"start":108.6,"text":"Losses for banks in the region would remain “contained” at no more than 1.3 per cent of their equity and a tiny fraction of their assets “due to the seniority of banks’ loans to private credit funds and the relatively small size of their exposures,” the ECB said. "}],[{"start":null,"text":"

"}],[{"start":124.39999999999999,"text":"The US private credit market has been hit by fears that debt-laden software companies that their funds have lent to are vulnerable to AI disruption, with some borrowers struggling to repay loans as interest rates have risen. "}],[{"start":137.39999999999998,"text":"Regulators have intensified their scrutiny of private credit, particularly since the recent collapses of First Brands and Tricolor in the US and Market Financial Solutions in the UK, all with heavy exposure to asset-backed loans, leaving some big banks with large losses. "}],[{"start":152.84999999999997,"text":"“Risks related to opacity and liquidity mismatches need to be addressed to ensure that private credit remains a stable and reliable source of funding,” the ECB said."}],[{"start":161.49999999999997,"text":"It called for “enhanced data collection and improved sharing of existing data across the EU” as well as more consistent definitions to “close data gaps” at a global level. "}],[{"start":172.84999999999997,"text":"The report also said more clarity was needed on whether liquidity and leverage restrictions recommended for open-ended funds by the Financial Stability Board, the global financial watchdog, should apply to global credit funds."}],[{"start":185.69999999999996,"text":"The report showed that Eurozone-based private credit funds had grown 14 per cent a year since 2010, but at about €100bn, their assets were still well below those managed by US-based funds."}],[{"start":197.54999999999995,"text":"The ECB said the US private credit market had grown rapidly to about $1.4tn by the end of 2024, making it comparable in size to the $1.5tn US subprime mortgage market that was widely blamed for causing the 2008 banking crash."}],[{"start":214.79999999999995,"text":"However, it said US subprime mortgages represented a much bigger share of GDP two decades ago. It added: “Unlike subprime lending, leverage in private credit is low, and most funding is long term and not subject to run risk.”"}],[{"start":236.54999999999995,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1779845192_3106.mp3"}