(Bloomberg) -- Wall Street’s top cop is sounding an alarm about the eurodollar market’s potential to foment instability in global economies, and he renewed warnings about risks embedded in private credit and artificial intelligence.
Much of the $13 trillion of US currency held offshore by non-US banks is uninsured, Securities and Exchange Commission Chair Gary Gensler said Tuesday during the Bloomberg Global Regulatory Forum in New York. This matters because eurodollar markets have played a role in deepening economic downturns across the globe, he said, including the 2008 financial crisis.
“There may be more work for those of us in the global regulatory community to ensure resiliency in the offshore eurodollar markets,” Gensler said.
Global upheavals have caused the US Federal Reserve to step in as the international lender of last resort to keep foreign financial firms afloat. The Fed shoveled billions of dollars into overseas banks during the Great Financial Crisis to keep the system functioning, and in 2020, it engaged in a massive buying of domestic corporate bonds to stabilize the global dollar-bond market, according to a May report by the Federal Reserve Bank of Atlanta.
In a separate interview with Bloomberg Television, Gensler called for global collaboration to regulate the use of artificial intelligence in finance.
With AI’s capabilities increasing exponentially each month, Gensler has repeatedly warned about the potential risk that thousands of banks, brokers, investment advisers and other financial firms will all rely on just a few underlying data sets to design ultimately similar AI systems.
It’s important for regulators to consider how to protect against what’s likely to be a “very concentrated interconnected system,” he said.
Private Credit
The SEC continues to keep a close eye on the burgeoning private credit sector, which now totals $1.7 trillion, he said.
“Though private credit has existed in some form for years, given its size has increased significantly, how will it weather times of stress at today’s or greater magnitude?” he asked during the forum. Gensler acknowledged the benefits of private credit, but also highlighted potential risks of its intersection with the traditional banking and insurance sectors.
“We’re looking at some of this, but I think overall it’s capital markets benefiting and the public benefiting from competition,” Gensler said in the interview.
Private credit’s attempt to break into retail markets is also drawing scrutiny. The agency is reviewing applications by the likes of State Street Corp., in partnership with Apollo Global Management Inc. and BondBloxx, to offer retail investors access to the private credit world via exchange-traded funds.
Gensler declined to comment on those specific applications during the interview, but said private credit firms in general will still have comply with the SEC’s basic tenets of risk management and disclosure.
While proponents have said retail offerings could allow mom-and-pop investors access to the higher returns that can come from private credit, consumer advocates have criticized the applications’ paucity of disclosures. They’ve also singled out what they see as a blurring of regulatory lines between sophisticated institutional investors and ordinary people who aren’t equipped to evaluate private credit investments.
(Updates with interview remarks on AI regulation and private credit, starting in the fifth paragraph.)
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