MFA President and CEO Bryan Corbett penned a Letter to the Editor that was published in the Financial Times. The letter pushes back on the assertion, argued in an op-ed, that private credit funds pose a systemic risk and should be further regulated.
Letter: Don’t Use Bank Crisis as Stalking Horse to Regulate Credit Funds
By Bryan Corbett
William Cohan’s opinion piece “Power shift raises case for a new regulatory stance” (On Wall Street, March 25) notes the growth of private credit, but incorrectly concludes it is a systemic risk to our global financial ecosystem.
There are fundamental differences between banks and private credit providers. Yet Cohan ignores the fact that credit funds are well regulated by the US Securities and Exchange Commission and structured to prevent systemic risk.
First, unlike banks, private credit funds are not implicitly or explicitly backstopped by the federal government. Therefore, taxpayers are not on the hook in times of stress.
Second, private credit providers are not subject to liquidity risk. Banks have depositors who can withdraw their money at any time. Credit funds receive capital from sophisticated investors who commit their capital to the funds for multiyear holding periods. The long lock-up periods prevent runs on a fund and provide long-term stability to corporate borrowers and other investors.
Third, private credit providers present no risk of contagion to other funds or the economy. If a credit fund fails, the losses are borne by that specific fund’s investors and do not impact investments in other funds. The failure is firewalled from, and will not ripple across, the broader financial system.
Cohan also fails to recognise the positive contributions credit funds make. Whereas banks curtailed lending to small and midsized businesses after the financial crisis, credit funds stepped up to support the economy by providing businesses with the financing to grow, fund research and development, and hire new employees.
Now is not the time to restrict the ability of credit funds to serve the economy. Policymakers should focus on the banking crisis at hand and resist using current circumstances as a stalking horse to impose stricter regulations on a non-systemically risky industry serving such an important need.
Bryan Corbett, President and Chief Executive, Managed Funds Association, Washington, DC, US