Asset managers are playing a larger and larger role in lending that has historically been done by banks. First it was credit for corporations. Next is consumers. It’s triggering fresh regulatory scrutiny — and new efforts by the industry’s lobbying arm to get ahead of a potential crackdown. MM spoke with some of the private credit world’s lead advocates on both sides of the Atlantic to get a sense of what’s coming and how they’re gearing up. A big takeaway is that it’s relatively early days for government intervention in the $1.5 trillion market, though the last several weeks have featured a flurry of activity from policymakers. In the U.S., Acting Comptroller of the Currency Michael Hsu last month cited private credit as a concern in a major speech on the blurring of banking and commerce. The Federal Reserve issued a report on the sector and raised financial stability questions to watch, including the extent to which the growth of private credit fuels corporate leverage and pressures underwriting standards. In Europe, regulators are beginning to roll out new rules. MFA president and CEO Bryan Corbett told MM that the group’s work on private credit and direct lending has increased over the past couple of years, with last March’s bank failures and the recent debate over big bank capital rules fueling further scrutiny. The group, which until recently was called the Managed Funds Association, is meeting more with bank regulators as well as Capitol Hill offices. While the firms facing questions are primarily regulated by the SEC, broader financial stability fears have attracted the attention of bank regulators like the Fed and the OCC. The Financial Stability Oversight Council would have the power to place a big money manager under Fed supervision, and it's been digging into the issue. (State insurance regulators are also paying closer attention because of the growing nexus between private equity and insurance.) “We're trying to keep the line between bank and non-bank regulation,” said Corbett, whose group is based in Washington and has offices in London and Brussels. “Bank regulators are clearly trying to shift the line and apply bank-like rules and regulations to private credit lenders. We firmly believe that based on the business model, lack of depositors, secure long-term funding, they're very different.” What’s at stake, according to Jiří Krόl, global head of the Alternative Credit Council, is whether there will be “severe constraints imposed on the ability to do what we do well without necessarily providing a policy justification for that.” The London-based ACC, an affiliate of the Alternative Investment Management Association, has meetings scheduled on Capitol Hill this week with offices that have been vocal on private credit. Krόl said the group is growing and trying to invest more in data and research. It recently recruited Joe Engelhard, formerly of MetLife, to boost its U.S. operation. “You know how it is in D.C.,” Krόl said. “If the coil is being wound, it’s a matter of having an event where all of a sudden a lot of things can happen very quickly because there might be a political window where legislation becomes possible.” Industry executives are also playing a more visible role in Washington. Apollo CEO Marc Rowan defended the regulatory treatment of private credit during a visit to the nation’s capital last month. During a public Q&A, he was asked by Carlyle Group co-founder David Rubenstein about banking industry complaints that private equity giants can extend credit without the same regulatory constraints as traditional lenders. “It’s a totally fair argument,” Rowan said at the event hosted by the Economic Club of Washington, D.C. “But it’s not a question of not regulated at all. It’s a question of regulated appropriately. What is the appropriate regulation for an entity that does not take deposits, does not have access to the Fed, does not have a government guarantee, does not do asset liability transformation and is 95 percent investment grade? … We are regulated, but we’re regulated in the same way an investment firm is regulated.” It’s Monday — Send tips to zwarmbrodt@politico.com.
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