Ahead of FSOC Meeting, Reed Presses Bessent to Review Emerging Cracks in the Credit Markets

WASHINGTON, DC - As concerns about private credit and systemic stress on the U.S. economy intensify, U.S. Senator Jack Reed (D-RI), a member of the Senate Banking, Housing, and Urban Affairs Committee, sent a letter to U.S. Treasury Secretary and Chair of the Financial Stability Oversight Council (FSOC) Scott Bessent, ahead of FSOC's meeting today, urging a "prompt review of risk that is building up in the credit markets and to assess whether these risks may become systemic."

Private credit is generally defined as lending by non-bank financial institutions -- including private equity firms and alternative asset managers -- to businesses that are often highly leveraged. In his role at Treasury and FSOC, Secretary Bessent has the unique power and authority to regulate the private credit system as a whole and for identifying risks as a result of the market's rapid expansion, hidden leverage, and complex interconnections that could cause widespread financial shocks. During his time at the helm of Treasury, there has been turmoil in the private credit market, even as the Trump Administration's Securities and Exchange Commission (SEC) has presided over a huge increase in Main Street retail investor exposure to private credit.

Today, the private credit sector is estimated to be a multi-trillion dollar industry. As the private credit market reaches huge scale, the Trump Administration is allowing it to operate with limited visibility and oversight.

Senator Reed's letter outlines concerns that U.S. regulators and investors may be blind to pockets of weakness in the private credit market because FSOC and the Office of Financial Research (OFR) -- which is designed to help regulators use financial data to see around corners and into dark areas -- have neglected their core responsibility to conduct forward-looking assessments of systemic risk.

Reed writes: "The gutting of the FSOC and the OFR have coincided with cracks emerging in the credit markets, particularly the less transparent private markets. Jitters about private credit quality have led Wall Street banks to restrict their lending and revalue their exposures. Many retail investors have requested to get their money out of business development companies and interval funds. Meanwhile, the Administration is preparing to place these exact funds into retirement plans and the FSOC is preparing to neuter the primary tool that Congress created to regulate nonbanks."

The letter continues: "To assess whether emerging cracks in the credit markets may burst open, I request that the OFR immediately map all market participants and their financial obligations to each other and that the FSOC conduct a forward-looking analysis based on this information."

Full text of the letter follows:

Dear Secretary Bessent:

I write in connection with tomorrow's meeting of the Financial Stability Oversight Council (FSOC) to urge you to conduct a prompt review of risk that is building up in the credit markets and to assess whether these risks may become systemic.

In the wake of the 2008 financial crisis, Congress established the FSOC and its sister agency, the Office of Financial Research (OFR), to see into dark corners of financial markets and address risks before they get out of hand. But I am very concerned that under your leadership, the FSOC is neglecting this core responsibility to conduct forward-looking assessments of systemic risk. And staffing cuts of around 50% at the OFR have severely diminished its capacity to be an independent early warning system of financial crises.

The gutting of the FSOC and the OFR have coincided with cracks emerging in the credit markets, particularly the less transparent private markets. Jitters about private credit quality have led Wall Street banks to restrict their lending and revalue their exposures. Many retail investors have requested to get their money out of business development companies and interval funds. Meanwhile, the Administration is preparing to place these funds into retirement plans and the FSOC is preparing to neuter the primary tool that Congress created to regulate nonbanks.

To assess whether emerging cracks in the credit markets may burst open, I request that the OFR immediately map all market participants and their financial obligations to each other and that the FSOC conduct a forward-looking analysis based on this information. This is precisely the job that Congress gave to the FSOC and the OFR, to measure and evaluate risk cutting across different institutions and markets to protect the entire financial system. Without this data and analysis, the Administration will be flying blind into a potential crisis and less able to mitigate the effects on the economy and taxpayers.

Thank you for your attention to this important matter.

Sincerely,

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