The world’s top financial stability watchdog has sounded the alarm on the booming private credit market, warning that opaque lending structures, rising leverage and deepening ties with banks could amplify stress across the global financial system.
In a report released Wednesday, the Financial Stability Board (FSB) said the fast-growing sector — now worth an estimated $1.5 trillion to $2 trillion globally — remains “untested in a prolonged economic downturn” despite its rapid expansion since the 2008 financial crisis.
The market is dominated by the U.S., followed by the eurozone area and the UK, according to FSB’s analysis. The watchdog is made up of central bankers, regulators and finance ministers from the G20 countries.
Banks, Insurers And Funds Increasingly Intertwined
The FSB flagged growing interconnectedness between banks, insurers, private equity firms and asset managers through credit lines, fund financing and strategic partnerships.
“Interconnections between private credit funds and banks, insurers, and private equity firms are deepening, raising potential vulnerabilities,” the report said.
The watchdog estimated banks have at least $220 billion in drawn and undrawn exposure to private credit funds, though it noted that commercial estimates suggest the figure could be more than twice as large. Though that is a relatively small share of banks’ total CET1 capital, other linkages could heighten risks, the FSB said.
European lenders have recently disclosed sizable exposure to the sector, including Barclays at roughly $20 billion, Deutsche Bank at $30 billion and BNP Paribas at about $25 billion.
Deteriorating Credit Conditions Call For Scrutiny
The FSB also warned about worsening borrower quality, especially in technology, healthcare and services sectors heavily reliant on private credit.
“Some private credit borrowers also appear to be relying more on payment-in-kind loans, which can also signal deteriorating credit conditions,” the report said.
The warning comes amid mounting stress in U.S. private credit markets, including rising defaults, redemption pressure at semi-liquid funds and growing scrutiny over software-sector exposure tied to AI disruption.
The FSB also urged national regulators to intensify oversight of banks and non-bank institutions involved in private credit, including closer scrutiny of valuation practices, liquidity mismatches and the use of private credit ratings.
The watchdog called for better aggregation of exposures and more consistent loan-level data, warning that gaps in transparency could make risks harder to detect during periods of market stress.
Image via Shutterstock
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