Bank of Canada governor Tiff Macklem, pictured in Ottawa on Wednesday, is the head of the Financial Stability Board committee for assessing vulnerabilities.Adrian Wyld/The Canadian Press
The global financial stability watchdog is warning that Canada lacks key data needed for oversight of the private credit market as concerns mount over whether related stress could lead to a crisis.
Increasing participation by retail investors and growing links between private lenders and the traditional financial system are adding to the risks related to the rapidly growing private credit industry, according to a recent report by the Financial Stability Board.
The report found that private credit data accessible to authorities in Canada across several categories was either incomplete or not available. This lags behind other countries, including the United States, Britain and Hong Kong, where the FSB said data is more accessible.
Many of Canada’s data sources on private credit are missing specific information needed to adequately examine risks, according to the report.
The report cited tracking by Statistics Canada, but said the data lacked granularity. It also pointed to oversight by banking regulator Office of the Superintendent of Financial Institutions, or OSFI, but found that certain data was missing collateral information or required “significant manipulation to extract insights.”
The FSB said the global private credit market – which it estimated to be valued at as much as US$2-trillion – is still “untested” in a crisis and a “severe economic downturn could expose” vulnerabilities.
The FSB’s committees are chaired by the world’s top central bankers and members include regulators and government ministers.
Finance Minister pitches digital trade mission to showcase Canada’s fintech capabilities
On Thursday evening, Bank of Canada governor Tiff Macklem – who is also the head of the FSB committee for assessing vulnerabilities – said the central bank is most concerned about retail investor exposure to private credit. He told the Senate committee on banking, commerce and the economy that there is a need for additional “guardrails” to ensure retail investors fully understand restrictions around redemptions and ability to access their cash, he said.
Mr. Macklem first commented on these concerns in April after an FSB meeting.
Speaking to the Senate committee, Mr. Macklem said publicity about retail investors being unable to redeem their money from some private credit funds “might be somewhat helpful in making sure people have fully appreciated all the fine print and understand what they’re getting into.”
“Private credit – it’s certainly present in Canada. It hasn’t grown as rapidly in Canada as it has in some other places, but it’s certainly something to keep an eye on,” he said.
Last month, Canada’s banking regulator said in an update on financial system risks that it is assessing banks’ exposure to private credit firms.
At a Bank of America event in March, OSFI head Peter Routledge said the regulator was monitoring risks linked to the rapid growth of the private credit market.
“There are isolated issues where we see risk concentrations building that concern us, but they’re isolated and idiosyncratic, and I haven’t seen evidence that they’re broadly systemic,” Mr. Routledge said.
“What we are certainly seeing is early indicators that there might have been some recklessness in growing loan books that quickly.”