Bank of Canada Warns on Private Credit Systemic Risk

BoC: Financial Risk Has Migrated Beyond Regulatory Reach

Bank of Canada Governor Tiff Macklem delivered a direct warning on the growing threat to global financial stability from nonbank lenders. He argued that post-2008 banking regulations successfully pushed riskier activities out of traditional banks but into less-supervised sectors, including hedge funds, pension funds, and asset managers. Macklem stated that while this shift diversified financing, “risks have not disappeared—they’ve migrated,” and that global surveillance has failed to keep up.

This concern is amplified by current market conditions, where the share prices of major private-market lenders have declined. Investors are weighing the potential for mass defaults on private credit investments and the risk that artificial intelligence could disrupt the software companies frequently backed by these funds. “Risks may be growing faster than our ability to understand and mitigate them,” Macklem said.

Hedge Funds Control 50% of Canadian Bond Auctions

One of the most acute risks identified by Macklem involves the oversized role of hedge funds in sovereign debt markets. Bank of Canada estimates reveal that hedge funds are buying up to 50% of new government of Canada bonds at auction and represent a significant portion of trading in the secondary market. This activity makes them a critical, yet volatile, component of government financing.

The primary concern is that these bond purchases are heavily financed through short-term debt, particularly repurchase (repo) agreements. A sudden market shock that increases interest-rate volatility could force these funds into a mass liquidation of their bond holdings to raise cash. Such an event, Macklem warned, could trigger “severe dislocations in sovereign debt markets,” with the stress rapidly spreading across international borders.

Trillion-Dollar Private Credit Market Faces First Downturn

The second major threat stems from the opaque, multi-trillion-dollar global private credit market. This sector, which provides loans directly from institutional investors to companies, operates largely outside the scope of global banking regulators. Macklem emphasized a critical vulnerability: “Private credit hasn’t been through a full economic downturn.”

The opaqueness of these loans means investors may not have clear information on the underlying credit quality, a risk highlighted by recent bankruptcies like auto-parts supplier First Brands. The governor warned that “weakness in private credit could spill back to the regulated sector.” Because the market is increasingly global, any such spillovers could travel quickly across borders, creating a chain reaction.