Bank of Canada Warns About Risks of Private Credit

The Bank of Canada is monitoring the rapid growth of private credit in Canada and abroad. Private credit involves businesses taking out loans from non-bank lenders, such as asset managers, insurers, and pension funds. This model has gained popularity worldwide, particularly among small- to medium-sized businesses seeking flexible capital for growth.

The Bank of Canada's analysis found that the share of private credit in Canada is still limited, but it has grown rapidly globally. In 2022, the combined value of private lending by Canadian investors and banks to private credit funds was estimated at $500 billion, with most of this activity taking place in the US.

While the Bank of Canada considers private credit risks 'manageable,' monetary policymakers remain vigilant due to concerns about its lack of transparency, complex structures, and potential contagion effects. The central bank noted that insurers and pension funds are stable investors in the private credit space, but domestic asset managers are a growing segment with relatively low risk.