Australia’s banking regulator plans to stress test the nation’s financial sector to shed more light on the impact of private credit capital flows on other market segments.

“Private credit is a new and emerging risk that we are looking at,” said John Lonsdale, chair of the Australian Prudential Regulation Authority (APRA) at a media conference in Sydney on Aug. 28. “We want to work on more transparency in this area and we’ve signaled that already there is quite a lot of opaqueness.”

Private credit is one of the hottest growth areas in financial markets right now with the investment class considered as an alternative to bond and loan markets where banks act as intermediaries. APRA plans to conduct a cross-industry stress test to track “the linkages between the different sectors and how private credit might flow,” Lonsdale explained.

The agency joins the Australian Securities and Investments Commission in increasing scrutiny on private markets as growing guardrails imposed by regulators elsewhere are put in place to manage potential risks. Private credit made up over 10% of Australia’s A$1.4 trillion ($950 billion) corporate debt market in 2023, according to restructuring firm Alvarez & Marsal, a share Lonsdale sees as “significant.”

APRA is also looking at “strategic asset allocation” and the exposure the country’s A$4 trillion retirement pool has to private credit. Australian private credit opportunities were previously limited mainly to super and pension funds due to high barriers to entry, but they are now becoming more accessible to individuals, wealth management firm JBWere said earlier this month.

Potential risks are “being discussed in international forums,” Lonsdale added. “We attend the Basel Committee and it’s an issue being looked at there. The same can be said at the Financial Stability Board.”

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