Federal Reserve Governor Tim Cook warns of private credit risks as central banks focus on systemic vulnerabilities

Federal Reserve Governor Tim Cook said officials should monitor how unexpected losses in private credit could spread to the broader U.S. financial system, given the "increased complexity and interconnectedness" of leveraged companies. She added that recent private sector bankruptcies in the auto sector have also exposed unexpected losses and exposures across a wide range of financial entities, including banks, hedge funds and specialist financial firms. Her remarks echoed the concerns of Federal Reserve Governor Barr, who said earlier this week that he views private credit as an area of latent risk. Cook also said Thursday that she sees the expanding footprint of hedge funds in the Treasury market and the level of asset valuations as potential vulnerabilities. Mr. Cook said the financial system remained resilient despite high asset values, the growth and complexity of private credit markets and potential vulnerabilities to hedge fund activity that could lead to disruptions in the Treasury market. "These emerging vulnerabilities also occur in the context of very significant technological changes that may ultimately improve financial stability, but also involve transitional periods and potential challenges that may require thoughtful and prudent responses," she said.