Colm Kelleher (UBS) warns of a systemic bubble in private credit, fueled by complacent ratings and practices similar to those that led to the subprime crisis.
Custom Ratings, reminiscent of the Subprime Crisis
The observation is stark. More and more insurers are ‘shopping around’ with small rating agencies, choosing those that will give the best rating to their private credit assets. This phenomenon, dubbed ‘ratings arbitrage’ by Kelleher, harks back to the race for flattering ratings that preceded the subprime debacle. As a result, billions of dollars worth of assets are valued on shaky grounds, inflated by opaque internal ratings, and lax regulatory oversight.
“We are witnessing an explosion of small rating agencies validating investments just to tick the compliance box. The systemic risk is very real because regulation is not keeping up.”
Private Credit, an opaque powder keg
Private credit has become Wall Street’s new darling. Faced with disappointing returns from traditional bonds, insurers have found an alluring alternative: direct loans to companies, often illiquid but high yielding. The issue lies in the fact that these assets are often evaluated behind closed doors, through ‘private letter ratings’ visible only to the issuer and select investors. Last month, the Bank for International Settlements (BIS) had already warned about ‘potentially inflated ratings’ and the risk of ‘fire sales’ in case of market turmoil. Two high-profile bankruptcies, Tricolor (subprime auto loans) and First Brands (auto parts), have highlighted how opaque and vulnerable this market remains.
The Pressure on Switzerland, UBS at the forefront
Kelleher did not mince his words about his own country. He believes that Switzerland is ‘losing its luster’ in the face of the rise of Hong Kong and Singapore in wealth management. Swiss exports, including watchmaking, pharma, and industry, are also feeling the heat from the 39% US tariff imposed this summer by the Trump administration, one of the highest ever slapped on a Western country. On the banking front, UBS is under scrutiny from Swiss regulators after the integration of Credit Suisse. Kelleher strongly opposes a tightening of capital requirements: ‘Switzerland is facing an identity crisis in its role in global finance.’
A stark warning
For the UBS chief, the circle is complete: after banks and subprimes, it is now the turn of insurers and private credit. The risk is no longer marginal: it affects a market estimated at several trillion dollars, where the pursuit of yield has outweighed caution. And while history never repeats itself exactly, it often rhymes.
