US Federal Reserve Governor Michael Barr has warned that stress in the booming private debt market could lead to “psychological contagion” and spread to the broader financial system, Reuters reported, citing an interview with Bloomberg News.Barr said the direct relationship between banks and private credit firms does not appear to be “overtly worrisome” at present, but other areas such as the insurance sector remain a point of concern for private lenders.“People can look at private lending, and instead of saying, ‘This is a weird problem, these were high-risk loans, the rest of the corporate sector is different,’ they can say, ‘Wow, the cracks are showing in our corporate sector. “There may be cracks in the corporate bond market here as well,” Barr said.He added that “then you may get credit crunched, and that can lead to more financial stress.”Private credit companies have come under pressure during the recent market downturn, with some investors pulling back amid concerns over valuations and lending standards following several high-profile bankruptcies.The comments come as regulators are monitoring the rapid expansion of private debt markets, which have evolved as an alternative source of financing outside traditional banking channels.Federal Reserve Chairman Jerome Powell said in March that policymakers were watching developments in the private credit sector for signs of stress, but did not currently see enough risk to threaten the broader financial system.