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The boss of JP Morgan, Wall Street’s biggest bank, said a downturn across the $3tn private credit market would not put financial stability at risk, adding that losses would have to be “very large” before the pain rippled out to major banks.
Dimon played down the potential impact that a series of private credit loan defaults would have on the wider financial system, arguing that while there were some areas of of weakness, the unregulated industry did not pose a “systemic” risk.
“The actual credit hasn’t gotten that much worse. There are pockets where it has … so we’ll be watching it closely,” Dimon told analysts during an earnings call on Tuesday. “The big point, to me, is … I don’t think it’s systemic.”
“You have to have very large losses in private credit before – at least it looks like – banks … get hit,” he said. “It doesn’t mean you won’t feel some stress and strain, and you might have to do something about it, but I’m not particularly worried,” Dimon said.
There have been growing jitters over potentially risky loans arranged by private credit firms, which lend to companies using investor money – rather than customer deposits or loans backed by those deposits – outside the traditional regulated banking system. Those anxieties have led to a multibillion-pound surge in withdrawals from some private credit funds such as Blue Owl, forcing them to cap the amount of money that clients can pull out.
Wider concerns over the state of the industry, which boomed after stricter lending rules were imposed on traditional banks, emerged last autumn after the collapse of two private credit-backed US auto companies, Tricolor and First Brands. Both companies have since been hit with fraud allegations, raising concerns over whether private credit lenders may have been too lenient when deciding whether firms were worth lending to.
Dimon himself warned in October that more “cockroaches” were likely to emerge after the firms’ collapse, while the IMF subsequently subsequently warned of potential ripple effects that could ultimately hit high street banks.
Big banks such as JP Morgan are also involved in private credit lending, but say they abide by stricter underwriting standards than some peers.
Goldman Sachs’s chief executive, David Solomon, said on Monday that the bank actually logged an increase in private credit investments in the first quarter. He suggested that while high-net-worth individuals were pulling cash from some “retail” funds, institutional investors that had a longer view of their investments were holding their ground.
“Our 30-year track record of performance and private credit is characterised by rigorous underwriting, selective deployment, and disciplined portfolio construction,” Solomon said.
JP Morgan on Tuesday reported a 13% jump in first-quarter profits to $16.5bn, while revenues rose 10% to $49.8bn.
