Private Credit & Systemic Risk
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Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marissa DiNatale, Chris Dries. Hi, guys. Hi, Mark. Hey, Mark. We just had a bit of a mishap on the introduction here. Franco tells me I had to say three, two, one.

And then start. And when I said three, two, I couldn't remember what this beginning is. I've only said it for four years running every week. I couldn't remember. Man, that's because you have muscle memory of just saying just that. Right. And when you add something to it, then you have no idea what you're supposed to say. It's like these passwords. Right. I mean, you know, do you do you have to change our password for the Moody's system like every week?

I had to do that again, and they're getting quite complex. I think that's the point. That's the point. Okay. Well, this is a special bonus podcast because we have a guest, a special guest, Sameem Gamami. Sameem, good to see you. Hi, Mark. Good to see you. Thanks for inviting me again. Sameem, when were you on last? I think January 2024.

January. Oh, so a little over a year ago, about a year and a half ago. And we were talking about the treasury bond market, right? You've done a lot of work there. Because you're at the SEC now, but maybe let the listener know a little bit about you just to reprise your background. Sure.

Sure. Hi, Marisa, Chris. It's good to be back. I've been a marketer with the SEC in the past two and a half years. I had the opportunity to work with the leadership team on different capital market reforms slash initiatives, including the treasury market.

that you mentioned. Prior to the SEC, I worked with the private sector, first Goldman Sachs, and before joining the SEC, Millennium Management. And before that, I used to be at the U.S. Treasury Office of Financial Research. And before that,

at the Federal Reserve Board as an economist. Wait, wait, wait, wait, Samim. Maybe I should ask, where haven't you been, Samim? It's like, what was that Tom Hanks movie? What was that guy? Yeah.

He had done everything, you know, shaking everyone's hand. Oh, Forrest Gump. Forrest Gump. And I mean that in a very nice way. I don't mean it any other way. You've been everywhere, everywhere in the financial system. That's so cool. That is so cool. Yeah. Okay. Thank you, Mark. Yeah. But now you're at the SEC and the views you express here are not

Exactly. So the usual standard disclaimer applies. I'm expressing my own personal views, not my colleagues at the SEC, the commissioners and the chair. What do you think of Forrest Gump? Did you like that movie? I think that's top 10. Don't you think? Yeah. So what do you think? No, I'm gonna learn a lot about you. Yeah. Yeah. Oh, I love that movie. Love that movie. Yeah. Now, Chris, was that top 10 for you or not so much?

I know you have like 10 Italian movies that are at your top tier. It's Sofia Loren, Sofia Loren, Sofia Loren. That makes sense. Total sense. I get you. Yeah, I like that movie. It's weird though. It's very bifurcated. There are people who hate that movie. Really? Are there? There are. Why? I've never met one. Although, they don't like the... They think it...

I don't want to speak for them, but there are people out there. There are people out there. There's a thing. It's definitely a thing. Anti-Forrest Gump. Yes. The whole life is a box of chocolate. I mean, that is like so perfect. I mean, yeah, that's really good. Okay. All right. Well, back to the topic at hand. So Samim,

We invite you back on and thanks for agreeing to come on. We have a paper. You and I and Damian Moore, Martin Worm, our two colleagues, and of course, Antonio Weiss. Antonio was a former treasury official who now has his own private equity firm, very involved in a lot of issues in the financial system. The title of our paper is Private Credit and Systemic Risk.

What a title, huh? Private credit and systemic risk in the same title. That should get some eyeballs. That should get some eyeballs, I think. Yeah. Right? Don't you think?

Yeah, absolutely. And I'll have to tell you, this may be the longest paper I've ever worked on. We've been at this for like a year. Yeah. A year, at least a year. I don't know how long, cause there's a lot involved here. Exactly. But, but I don't want to, I don't want to steal the thunder. Maybe I'll just turn it back to you. Can you just give us a kind of a synopsis of what the paper is about? You know, what, what do we do and what are the results? Sure. I mean, we all know, uh,

about the notable growth of the private credit sector in the past 10, 15 years. That's very well known.

I think what we have been doing- Can I say, Samim, I'm sorry, I want to do this, but maybe just take one step back. Just describe private credit for the listeners out there. What is private credit? I mean, I'm sure everyone's heard about it. It seems like it's the topic du jour. Moody's has a conference this week on private credit. I mean, in simple terms, I mean, direct lending is,

to small to medium sized firms that would be outside of bank lending and outside of public bond markets. So, and this type of direct lending usually is being carried out by private credit funds. And I mean, we can go through all the details, but

Probably that's the simplest way to explain private credit, what we mean by this asset class. Yeah. Okay. Okay. So private credit and... Yeah, sure. So I was mentioning that, I mean, it's notable growth in the past 10, 15 years is well known. It's roughly right now between $1.5 to $2 trillion in the U.S.,

two including the so-called dry powder, one and a half excluding that part,

I think what is novel about our collaborative work is we are trying to essentially assess systemic risk in the financial system in the presence of the private credit sector. So in that sense, hopefully our paper would be insightful and contribute to the literature.

Yeah. So private credit is this, you called it asset class. And so think Apollo, BlackRock, these are- KKR. KKR. There's lots of smaller players, but those are the kind of the big players in the market. Exactly. And basically they lend to businesses, but they do it outside. They're not banks and they are-

not regulated in the way a bank is. But at the end of the day, it's simply about providing credit, providing funds to businesses, non-financial corps to do their investing, hiring, and expanding. And their funds come from institutional investors, like pension funds, insurance companies, sovereign wealth funds, that kind of thing. So they're an intermediary like a bank, but they're not a bank.

Exactly. So these are particular, now very important class of the so-called non-bank financial intermediaries.

Right. And so they've been around a long time, but they seem to have really kind of kicked into high gear here post-financial crisis, in part because the banks themselves got obviously in a great deal of trouble during the GFC. The result was a lot of regulation, higher capital, more liquidity, greater oversight. And so that started to push the lending out of the banking system into the private credit world. Yeah.

Exactly. Right. So we've seen all this growth. And now you're saying, look, it's $2 trillion. I think if my arithmetic is correct, there's, what, $14 trillion in non-financial corporate debt outstanding. So it's a meaningful sized player. Exactly. You're saying what role has that played in the broader financial system? What does it mean for the broader financial system?

Exactly. Exactly. And I think one of the points that you just mentioned is very important because maybe it's good to first highlight the benefits of this asset class or this industry, private credit funds. So, for example, we know that after the COVID shock, large banks and

didn't essentially, I mean, the credit provision of large banks to small and medium-sized businesses were minimal compared to the credit provision to very large, well-established corporations. So in that sense, they are, you know, feeling a slack. So that's good to have a credit provision provision

to the SME sector. Yeah, got it. Okay. So before we move on to kind of what we did in the results, let me turn it back to Chris and Marissa. I know there's a lot of complexity here. Think about it from the perspective of the listener. Are there some questions you might have that you want to ask Samim to kind of flesh this out? Or did we get good enough? Did we explain it well enough? I think the

just primer on what private credit is, is helpful. I mean, it kind of reminds me of like a hedge fund or a private equity fund that's then lending funds out, right? To, as you said, small and medium-sized businesses that can't tap into or don't want to tap into debt markets or go to banks for lending. What's the benefit of a company borrowing? Can I just say before you move to that though,

Samim, do you want to just make the distinction between private credit, private equity, and hedge funds? Because they are different things. Sure. Yeah. So if you think of the capital structure of a private company, like a software company, so private equity firms would target the equity part of the balance sheet or the capital structure. Private firms

credit funds or entities who target the debt part. And it is indeed the fact that many private credit funds are sponsored by private equity firms.

That's indeed the case. Yeah. And in terms of hedge funds, I mean, there is now this well-known so-called alternative asset class. So some of even large hedge funds that used to be only active in public markets are

bonds, stocks, derivatives, over-the-counter or exchange-traded. Now they also have allocation to the so-called alternative asset class, private credit, private equity being a subset of that. Okay. That makes sense. Is private credit equivalent to non-bank lending or do you view it as a narrower...

One may even argue that could be even broader, but non-bank lending, which is outside of also the public bond market, corporate bond market. Yeah, exactly. Okay. So would that include a household lending, like a buy now, pay later by a finance company? Just for the listener, so I understand the-

So I don't know if there, I mean, Mark, please correct me if I'm wrong. There is a dictionary definition of private credit, but mostly what we mean by private credit is lending to small to medium-sized companies. And as we go along the way in our discussion, maybe we can also mention that nowadays in the most recent past, private credit funds also lend to small

I mean, very large companies as well. Yeah, I think historically, traditionally, certainly until recently, you would think of private credit lending. These are

lenders to businesses, non-financial businesses. But there are other non-bank financial institutions. You mentioned Buy Now, Pay Later. There's the non-bank mortgage lenders. There's a lot going on in the non-bank part of the financial system. Private credit is

part of that. But now these are distinctions without a difference, right? I mean, things are kind of evolving and melting together and it's hard to make these distinctions. But right now, I think that's a good way of thinking about it. And Marissa had a good question on Cutter Off was, why would a business decide to go to a private credit firm as opposed to a bank? Why would that happen?

Because it could be too small to issue bond in the public market and it could be highly levered and too risky for banks to borrow money from. And like you mentioned at the beginning, Mark, post-GFC bank capital and liquidity regulation, it's well known that it has made particularly large banks very safe

very resilient, but for example, it has to some extent diminished its market making capacity. For example, in our discussion on treasury markets, we can discuss that. Also diminished to some extent their ability to lend to SMEs.

I mean, this is just a consequence of higher capital and liquidity rules, particularly at G-SIBs, global systemically important banks, particularly in the U.S. Yeah, so the typical borrower of a private credit would be probably riskier than what would go to a bank. And the lending is more bespoke. You know, it's less off the shelf. This is the kind of loan we have. Take it or leave it. That's what a bank would... I don't mean to...

overgeneralized, but roughly speaking. But what a private credit firm would do would provide a much more tailored solution and they're much more hands-on in terms of managing the risk and making sure that everything is, all the covenants are being met and everything's sticking to script.

But they also have higher returns as a result. They take more risks, they have higher returns in general. The other thing that's going on is that because of the, Samim mentioned, because of capital rules, there's a bit of a, this is the way I think about it, I haven't heard anyone say this, but maybe they have and I missed it. There's a bit of capital arbitrage going on. I mean, if a bank does the loan, they have to hold a certain amount of capital. If they take that and lend it to a private credit fund who then goes, lends the money

The capital level they have to hold against that is a lot lower. So there's a bit of that going on as well. So there's a lot of that stuff. A lot of stuff that goes on. Is that why this market has kind of taken off? Is that the reason, the capital? Or are there other reasons why all of a sudden we see the growth of this industry?

I think the high level reason is that banks, particularly large banks, lend, I mean, they mostly lend to large corporations compared to the SME sector. That was the original reason, I think.

Because of higher capital liquidity regulations. Sorry, Mark. Yeah. And I do want to point out, you know, one of the benefits of private credit is that it's better maturity matching. So what a bank does, right, is takes deposits that are short, generally short term, that people can pull those out tomorrow or in the next hour if they want to, and they can easily. And we saw that with SVB.

that people can run. So it's short-term deposits and they lend that out for a loan that's longer term. So they've got this so-called maturity mismatch, which is a fundamental kind of problem with the banking system. That's why you have all these runs. That's why you have deposit insurance and regulation and capital and all that kind of stuff.

With private credit, they're getting funds from insurance companies, pension funds, sovereign wealth funds, people, investors that don't need their money right away because their obligations are longer run. Think about an insurance company. Their obligations are very long run. So they can take their investment dollars, give it to a private credit fund who can then match the maturity with the loans they're making. So you don't have that maturity mismatch.

And so much less likely that you can get this kind of run on the financial system. And therefore, that's a big deal. I mean, I think that's important. No? No.

Exactly. Yes, that's very important. I mean, exactly like you mentioned, Mark, I mean, the so-called classical maturity transformation that takes place in commercial banks, taking deposits and lending commercial loans. I mean, that's not the case in private credit because of the presence of institutional investors like insurance companies and public and private pension funds. Exactly.

Okay. So let's move forward. So we're examining the private credit funds in the context of the wider financial system, banks, other non-bank financial institutions, brokerages, insurance companies. And our paper dives into the question about systemic risk. So you want to explain that part of the paper? Sure. So, yeah.

I mean, before getting into systemic risk, maybe it's important to mention that naturally, compared to public markets, private markets, both private equity and private credit are not transparent. Right.

This is the downside. So we heard the upside, that's the downside. That's the downside. So because of that, in our systemic risk analysis, we have proxied private credit, this asset class, by a subset of that, which are

BDCs or business development companies. So this subset BDCs, they can also be public or private or non-traded, but we have focused on a number of public business development companies. So these BDCs are also direct lenders to small and medium-sized businesses

but the public ones, their stocks are being traded in stock exchanges. So we have, for example, information on their stock prices and on their default probabilities. So the high level goal of our analysis is to try to quantify

the level of interconnectedness in the financial system in the presence of private credit proxied by BDCs and also try to quantify contagion risk in the presence of private credit. So we do this by using well-known econometric, by constructing and estimating well-known econometric systemic risk measures.

And before I get into the details of the analytical framework, maybe I would just mention the high-level results of our paper. So what we have found is that in the presence of private credit, the level of interconnectedness in the U.S. financial system has increased since the GFC.

We have also found that when it comes to quantifying contagion, we have found that BDCs, i.e., private credit firms, their impact on banks and other non-bank financial intermediaries have increased over time.

since the GFC, also the other way around, meaning banks and other non-bank financial intermediaries impact on private credit firms have increased over time. So we have these two high level results on quantifying, approximating interconnectedness as it has evolved over time in the financial system. Similarly, contagion or contagion risk

And we link this result to a well-known result from economic network theory that when the financial system or financial network becomes more interconnected,

then under small negative shocks, it could reduce risk to financial stability. But beyond the threshold, under large negative shocks, it could increase risk to financial stability. So that's essentially that's the main conclusion of the paper. Yeah.

Yeah, there's a ton to unpack there. And so what you're saying, and just to take a step back to let everyone to kind of digest this, you go, look, we've got information on stock prices for lots of different financial institutions, banks, insurance companies, including BDCs, business development corporates, which are a form of private credit. There's different flavors of private credit. We pick them because we have the most information there. Some of them are publicly traded, so we can get a lot of information there.

And also so-called EDFs, expected default frequencies. That's Moody's concept of default, again, for these individual financial institutions. We econometrically relate the stock prices with each other and the EDS with each other to see what the relationships are like.

And what we found was that, broadly speaking, the system, the financial system is now more interconnected than it has been historically. When you say GFC, you mean the global financial crisis, particularly since the GFC.

And so we're more interconnected. But the nature of the system has shifted. If you go back pre-GFC, it was very bank-centric, kind of, if you can think of a network, more hub and spoke with the banks sitting at the hub and everything else sitting out on the spokes to more of a web. It's now a web of relationships within the network, which means, and this is where you kind of ended,

that in a typical kind of environment or a modest risk-off environment, then the system actually may be more stable because the risk is distributed more widely around the shock, the effects of any shock is distributed more widely around the system.

But if you get into a more severe stress scenario, because the system is now so interconnected, it could be very fragile and ultimately be a serious systemic risk. Did I get all that correctly right? Exactly. And that's a very well-known result in economic network theory, like I mentioned.

a few minutes ago, but exactly that's the essence of it. And as you pointed out, I mean, we rely on stock return time series. We also rely on Moody's default probability time series for different classes of financial firms. So we have essentially four different sectors in our

quantitative exercise, the banking sector, BDCs, we have 15 BDCs in our analysis. We have insurance companies, large insurance companies, and we have a last category that we have referred to as

other non-bank financial intermediaries, meaning financial intermediaries outside of the private credit asset class. So we have these four sectors

these two sets of time series, stock returns, default probabilities. And essentially we are, like you mentioned, Mark, we try to quantify the level of interconnectedness, how it has evolved through time. Similarly, approximate and quantify contagion as it evolves through time. Yeah.

Yeah. And the one thing that point that I think is important for the listener is that the reason why we went down this econometric path, you know, statistical path is because the information necessary to do a more, let's call it a forensic accounting of the relationships between these institutions with each other.

You can't do it because that's one of the downsides of private credit in general, less so with BDCs, but private credit in general, is the information isn't available to do that in a systematic way. It's not like the banking system, which is highly regulated. You have a ton of information. It comes out on a regular basis. Everything's clearly laid out and defined. Even then you have trouble connecting all the dots, as we can see with the banking crisis two years ago. But with private credit, you just can't do that. So we take this

this statistical approach and based on that statistical approach, we can find these relationships and, you know, come to these, these conclusions about the, the interconnectedness of the system and how it's evolved over time. Yeah. Does that, Mercer, did that, does that all make sense? Does that, is that clear? Yeah.

Yeah. Sorry. Yeah, it is. It is very much so. Okay. Chris, is everything, is that all clear? You know, the way we described it? Yeah, the structure is clear. I guess I'm very curious. I'm assuming you have a tipping point, right? To determine when is the shock small enough that it's beneficial to have the network versus so large that it...

Convergence to contagion. Is that next? That's a sequel. Part two. Jumping ahead. So that's a really good question. Maybe it might be helpful that I just mentioned that

This is also relatively well known that that threshold or whether we would view some of the shocks to the economic and financial system, small negative shocks or large negative shocks, that's in part a function of excess liquidity in the financial system. So in a scenario where we just mentioned four different sectors, in a scenario where banks are well capitalized have

sufficient liquidity and capital buffers. Similarly, private credit funds slash private credit firms, insurance companies, pension funds, all the institutional investors in the private credit value chain are well capitalized. Then that threshold is really high.

Right. Otherwise, I mean, a shock could be viewed as a large negative shock to the financial system. I mean, even in normal conditions, if we don't have that much of excess liquidity in the financial system.

Right. Okay. There was one thing, you know, when we were going back and forth on email and preparation, you mentioned something about this work and how it relates to monetary policy that you wanted to bring up. Sure. Yeah. You want to explain that? I've forgotten how to connect those dots, but...

So we were discussing this idea that after the COVID crisis and during the federalism fight of high inflation in the U.S. economy, there has been analysis slash commentary on inflation.

the fact that monetary policy, the stance of monetary policy in the US has become less sensitive to interest rates. So, and this high level view was, I mean, it is shown by other researchers, economists that even after the COVID shock,

also during the inflation fight and

rates hike by the Federal Reserve, the credit provision by the private credit sector did not decrease. So that's essentially mean that, I mean, with the growth of the private credit sector, one would need to think a bit more carefully about the whole monetary policy transmission

I think the minimum that we can intuitively say that is that, uh,

I mean, in the presence of private credit lending, the lags associated with monetary policy could be extended notably. That's something. And again, the evidence is that around 2022, between 2021 and 2022, the credit provision by the private credit sector, I mean, expanded.

Yeah, it's almost like you're saying private credit saved us from a recession. It's kind of what you're saying. That's right. An interesting aspect of that is this happened despite of the fact that there is evidence that private credit funds and entities passed higher interest rates to the borrowers.

So it's a quantity result as opposed to a price result in the sense that, yes, higher interest rates were passed to the private credit borrowers, but I mean, the quantity of credit. Yeah, exactly. Yeah. What you're saying is the way monetary policy impacts the economy, the real economy, consumer spending, business investment, trade, that kind of stuff.

It's through interest rates, the cost of credit, and also the availability of credit. So if I'm a bank, I can tighten down on underwriting standards. I don't need to raise the interest rate. I can do that, but I can also just say I'm not lending to you because you're no longer credit worthy in the context of who I want to lend to. So the private credit industry has kind of stepped in

And now they do pass along higher interest rates because a lot of those loans are short-term, shorter. The loans themselves roll over, don't they? They have interest rates that roll over. You're saying that it's more about the availability of credit, that the private credit firms continue to provide credit in this period when the Fed was jacking up rates, trying to slow the economy. And because you had all this credit out there, it kept the economy moving forward. Exactly. And you didn't have...

didn't even slow down. Exactly. Very interesting. There's also a whole slew of implications for policy here too, which we dive into in the paper about what does it mean for regulation. Did you want to comment about that at all, Sami? Yeah, sure. So, I mean, from my personal perspective, I mean,

The policy recommendation in our paper that has something to do with macro prudential policy is one of the most important ones in the sense that, I mean, we just discussed briefly the benefits and potential benefits of private credit entities, but we also discussed the importance of being able to

monitor their systemic importance and their contribution to, and their impact on systemic risk.

And so under this broad umbrella of macro prudential policy, one subset of that is systemic risk monitoring. So if at some point private credit markets become a bit more transparent, both from the perspective of regulators and also investors, I think it would make sense to...

I mean, monitor systemic risk in the presence of private credit. That's one aspect of bringing private credit under the umbrella of macro prudential policy. Another one that Mark, we discussed recently was central banks, the Fed thinking about, I mean,

lending facilities directly or indirectly to private credit entities or banks that provide, for example, credit lines to private credit firms. So these are two, I think, important aspects of having private credits under the umbrella of macroprudential toolkit of a central bank and

regulators. Yeah, when you talk to folks in the private credit world and you bring up the point about transparency, that the industry is more opaque, meaning it's hard to get the information, the data that you need to do a good assessment of the risks that private credit poses,

to themselves and to the broader financial system, I get a pushback saying there's lots of information available. There's lots of data available. How do you think about that? How would you respond to that? So I think, I mean, compared to...

Again, this is only in comparison with highly regulated entities like large banks. That's one point. Another point is some data sets are only available to regulators. That means that institutional investors

Some of the very important consequential ones like public and private pension funds may not have sufficient visibility into what is going on in the portfolios of private

private credit entities. And the third point is that these data sets, this information on private credit market is not, I mean, it's not, for example, a transaction level. So we discussed, for example, the relative transparency associated with information on public

business development companies, BDCs. But I mean, that's not the case for, that may not be the case for private or non-traded BDCs.

I mean, and the last point being so different. That's also in our paper, different policymakers, regulators collect and analyze different pieces of information. Securities regulators, regulators,

banking regulators. So I think we also mentioned in the paper, like others, for example, people at the IMF, researchers at the IMF, that it needs to be some type of coordination among regulators and policymakers.

to monitor developments in, I would just say, private credit value chain, not just the private credit funds and entities, but for example, their borrowers. A large software company may borrow from a private credit fund, but we may not know enough about the loan valuation associated with the large software company and how it evolves over time.

So private credit valuation is also an important piece of opaqueness in the private credit industry. So bottom line, this is me now, my kind of takeaway from all the work was, look, private credit is here to stay. It's providing a great service. It's key to the well-functioning of the financial system.

It does change the nature of the system itself. The system is now much more interconnected. There's much more of a web than there has been historically, which under most conditions is not a bad thing. It's probably a good thing. But having said that, you know, we do worry. I do worry about, you know, if the system comes under a lot of stress, particularly in the context of not having sufficient information and data to judge that risk and concern, you

And as such, it would probably be wise for regulatory agencies, the Federal Reserve, to really think about how to bring private credit back into kind of the regulatory perimeter, at least in the sense of getting that information that we need to make a clear-eyed assessment of what's going on. Does that sound right? Yeah, absolutely. Okay. Okay.

Chris, Marissa, anything before we move on? We're running out of time and I want to get to the treasury market, but just I want to make sure if that all made sense because it's very, very difficult to get your mind around a lot of moving parts. It does. Maybe a quick question. Are you more concerned by the growth of the private credit industry overall or the concentration into just a few key private credit entities or both or neither, I guess?

I think both in the sense that, I mean, it's not a concern necessarily, but it's a fact that, I mean, there is growth, massive growth in the private credit sector. Also some concentration by some of the very large players, like Mark mentioned at the beginning, Apollo, KKR, parts of Blackstone.

But it's not a concern per se because, I mean, what we are saying slash recommending is monitoring these developments, monitoring the impact of the private credit sector on systemic risk on financial stability.

Great. Marissa, anything? No, I think that was good. Okay. Well, Samim, since we have you, and it's been a little over a year since we chatted about when you were on previously, we chatted about the treasury market. It doesn't feel like things have changed in the sense that the system, the treasury market seems still to be

quite volatile. The plumbing doesn't seem to be working all that well. The primary dealers still are kind of, when I say primary dealers, these are the folks, these are the institutions within large banks that make the market do the buying and selling. They're not, they got platforms as well, but the primary dealers are still big players. It still feels like the plumbing is still

Fragile. Do I have that right? Has there been any change or improvement with regard to that?

I agree with you, Mark. But before I get into plumbing, maybe I would just mention that, I mean, at the high level, I think liquidity problems with the secondary part of treasury market that we experienced, for example, after the COVID shock, that was the same.

scariest one, till what the treasury market turmoil in April of this year. I mean, the high level issue is supply demand imbalances, meaning as long as the trajectory of the U.S. public debt and deficit

would not indicate that it would be sustainable, then I think we have more supply, less demand, and that would deteriorate liquidity in the secondary part of the treasury market. I think that's the big issue. But in terms of

reforms to make sure that the treasury market has remained, I mean, will maintain its liquidity. Some of the reforms have been implemented, some not. So for example, last time we discussed the so-called treasury clearing rule at the SEC, it will be hopefully fully implemented now by mid-2027.

For example, I heard a few days ago that Secretary Besant mentioned that we will have something on the supervisory leverage ratio, hopefully this summer. So if you have something on that, that would hopefully mean that banks, large banks that are intermediaries in the secondary part of the treasury market,

can essentially absorb treasury securities during crisis periods. That did not happen as we discussed before after the COVID shock, in part because of some, I mean, regulatory issues. The prime example being supervisory leverage ratio.

So I'll stop here. Please let me know. Yeah, so it sounds like you're feeling a little bit better about things. A little bit better, but again, what happened in early April was worrying a lot.

So in the sense that the extent of problem when it comes to liquidity of the treasury market wasn't comparable with what we experienced after the COVID shock March and April of 2020, but it was pretty dramatic as well. I mean, in early April. Yeah.

Yeah. And am I right? More and more of the trading is being done on clearinghouse platforms. Is that increasingly the case?

I mean, that would hopefully be the case in two years from now. It hasn't started yet? It has not started yet. But something we discussed one and a half year ago was other players, for example, large hedge funds or large hedge funds or non-bank affiliated broker dealers are now

I mean, becoming main market makers in the treasury market, these players can be highly levered and during crisis episodes, they can unwind some of their positions that would consist of, you know,

cash treasuries and repos, and that could adversely impact liquidity in the treasury market. That was part of the reason of the turmoil in the treasury liquidity in the treasury market in early April. But I think if you ask me, maybe the main cause was because of investors' concerns about the impact of tariffs. So, I mean, that was the

maybe the main problem, but also some of the levered firms really active in treasury markets trying to unwind some of their positions and sell treasury securities. Okay. Just I want to repeat it back just to make sure I've got it right. So my understanding is that the primary dealers

have not expanded the size of their balance sheet consistent with the amount of treasury debt outstanding. Of course, we know there's a lot of treasury debt headed our way given the big budget deficits that are entrained

under the reconciliation legislation, deficits are 6%, 7% of GDP ad infinitum into the future. So there's going to be a lot of supply. And the primary dealers haven't been able to keep up with that or have decided not to because of, as you said, capital or liquidity restrictions, that kind of thing.

And also they might be, correct me if I'm wrong, but they're looking at this kind of clearinghouse platform-based trading that's in train and maybe asking, is this a long-term strategy?

business model for me to be a primary dealer. So on this, I would just completely separate the two. The so-called principal trading firms, for example, Citadel Security, Millennium Management, they have been active liquidity providers to some extent in the treasury market.

So the problem is that it's good that they provide liquidity in the treasury market in normal times. What is concerning is that at normal times, they may also rush to sell treasury securities, and that could lead to some illiquidity issues. On the central clearing side, what hopefully the SEC treasury clearing rule would do is

bring more transparency to the secondary part of the treasury market.

cash part, repo part. Also because of central clearing and central counterparties margin requirements, some of these highly levered positions may be contained. So in crisis episodes, we may see fewer disruptions in the liquidity in treasury markets. Okay, okay, very good, good, good.

Okay. Chris, Merce, anything on that? No? Okay. All right. Very good. Samim, it was great to have you on. Really appreciate it. And thank you for all the hard work over the past year. I know that took a lot of energy on your part. And I have to tell you, I really enjoyed working with you, of course, and the team. Likewise.

And what I enjoyed most was you and Damien going at it over God knows what. To tell you the truth, I couldn't follow half of what you were saying. But it was pretty cool to see these two statistical titans going at it. It was like, you know, pretty amazing. Thank you, Mark. Likewise, I really enjoyed our collaboration.

I mean, the collaboration with you, Damian, Martin, and Antonio, and looking forward to seeing your paper published. And thanks for inviting me again. Absolutely. Thank you so much. Guys, anything? And where should people look for the paper if they want to see it? It's going to be on Economic View. I think on economy.com, all the Moody's websites, I think. We'll get it up there. And yeah.

I think, well, I won't get ahead of myself. There's other places we may be publishing. But it'll be on Economic View. That's probably the quickest, fastest way for people to get it. You can always send an email to helpeconomy at moody's.com. I was trying to avoid saying that because I keep forgetting what that is. At helpeconomy.com.

Help economy at moody's.com. Help at help. Okay. Yeah. Let's see. That's the problem. Help economy. One word at moody's.com and we'll send it to you. Okay. Send her questions, comments there as well. Okay. With that, we're going to call it a podcast. Take care, everyone. Talk to you soon.