Concerns are mounting that "private credit" risks could materialize amid a growth slowdown driven by the prolonged Middle East war, deteriorating corporate earnings and high interest rates. Following the International Monetary Fund's (IMF) warning about private credit risks in its Global Financial Stability Report last week, domestic financial firms are also pointing to potential defaults in private credit funds and the possibility of investor redemption requests. Private credit refers to non-public lending in which asset management firms pool capital from investors and lend directly to companies, bypassing banks or public bond markets. Its scale is estimated to be enormous. Yet not only the precise investment amounts but also operational conditions and default levels remain largely unknown, making it a prime example of "shadow banking."
The global private credit market has exploded by exploiting gaps in regulatory blind spots. The IMF estimates that private credit has grown roughly fourfold over the past decade to around $2.15 trillion (approximately 3,250 trillion won). The situation is similar in Korea. According to the Financial Supervisory Service (FSS), 12 securities firms invested 17 trillion won in overseas private credit funds last year, a 23% increase in a single year. Some analyses suggest that combined exposure, including that of other financial firms and institutions such as insurers, banks and the National Pension Service (NPS), exceeds 60 trillion won.
The problem is that redemption requests are flooding in from overseas. In the first quarter, investors in U.S. private credit funds sought redemptions exceeding 30 trillion won. Credit rating agency Moody's downgraded its outlook for the private credit industry, and the U.S. Treasury Department and the Federal Reserve have launched investigations into fund runs. They have concluded that corporate defaults and capital outflows driven by a deteriorating business environment may not be a one-off event but could continue for a considerable period.
Financial authorities cannot afford to dismiss the private credit defaults and redemption requests on Wall Street as someone else's problem. They must significantly strengthen stress tests, including precise examinations of the investment holdings, operations and default conditions of Korean financial firms and individual funds. Leaving the issue unattended on the grounds that there are no immediate major problems could lead to the mistake of individual fund defaults spreading into a "systemic crisis." Authorities should swiftly establish macroprudential standards covering non-banks and shadow banking, while ensuring that consumer protection measures against mis-selling and other malpractices are not neglected.
