(Bloomberg) -- The rise of the private credit market may lead to less systemic risk in the US financial system despite a lack of political appetite for increasing bank capital requirements, Federal Reserve Bank of Minneapolis President Neel Kashkari said.

Most Read from Bloomberg

• How Mexico City Averted All-Out Drought

• Inside the ‘Utopias’ of Mexico City

• Dubai’s Allure to Expats Is Weighing on City’s Infrastructure

• The Master Plan That Shaped Pakistan’s Capital Is No Longer Working

• What It Takes to Make City Solutions Go Viral

“It’s scary at some level, because it’s exploded to a trillion dollar plus market fairly quickly,” Kashkari said in Buenos Aires on Monday. “But as I’ve examined it, a bank in the US today — a big bank — is levered roughly 10 to one, 10 times as much assets for their equity. These private credit vehicles are typically levered one to one, so it’s much less leverage.”

Private credit — which generally refers to loans from non-banks — has been surging over the past few years, offering investors attractive returns versus other fixed-income products in an environment of rising interest rates. For borrowers, it’s become an alternative source of funding that does away with many of the more stringent requirements that are typical in bank lending.

Kashkari, said private credit vehicles may also introduce less risk because they typically lock in capital for longer compared to banks, which need to provide overnight liquidity.

“So where does systemic risk come from? The intersection between leverage and maturity transformation. So on both those dimensions, these private credit vehicles look like they’re much lower risk than banks,” he said during a Q&A session at Torcuato di Tella University.

“While I wish we had tighter regulation on the banks, I’m actually cautiously optimistic that some of these market developments might actually lead to less risk — at least less systemic risk — in the financial system,” he added.

Regulators around the world have increased their scrutiny of the burgeoning $1.7 trillion private credit market in recent years. While many have dismissed concerns that the industry poses risk to the financial system, some have called for increased transparency and reporting.

A top European Central Bank official said last week that banks don’t fully grasp their exposure to private credit funds, creating the need for stronger reporting requirements. The US Securities and Exchange Commission earlier this year signaled anything from market concentration to the way assets are valued will face more scrutiny.

(Adds recent statements from ECB and SEC in last paragraph.)

Most Read from Bloomberg Businessweek

• Why OpenAI Is at War With an Obscure Idea Man

• How Starbucks’ Colorful, Sugary Drinks Turned Kids Into Customers for Life

• When a Miracle Cure Is Left on the Shelf

• How Airbnb Hosts and Frustrated Neighbors Can Find Common Ground

• China Is Playing Catch-Up to Elon Musk in Space

©2024 Bloomberg L.P.