Source Credit : Portfolio Prints
Financial Stability Board has urged national regulators to step up oversight of the rapidly expanding private credit market, warning that banks, asset managers, insurers and private equity firms face mounting risks tied to the roughly $2 trillion sector.
In a comprehensive report released Wednesday, the FSB highlighted structural weaknesses in the industry, including limited transparency, inconsistent data standards, opaque valuation practices and increasingly complex funding structures. These factors, it said, are creating vulnerabilities that could spill over into the broader financial system.
The warning comes amid rising unease in the U.S. private credit market, where concerns range from concentrated exposures in sectors such as software to strains in business development companies and isolated corporate defaults.
The FSB—comprising central bankers, regulators and finance ministers from G20 economies—flagged the growing interconnectedness between private credit funds and traditional financial institutions. Linkages through bank credit lines, revolving facilities and strategic partnerships are becoming more prevalent, raising the risk of contagion during periods of stress.
According to FSB estimates, banks have extended around $220 billion in drawn and undrawn credit lines to private credit funds, although commercial data suggests the true figure could be significantly higher. While still modest relative to total bank capital, the watchdog cautioned that indirect exposures and overlapping risks could amplify systemic vulnerabilities.
“These include riskier fund-level financing, overlapping lending relationships where banks and private credit funds finance the same borrowers, and a rise in joint ventures between banks and asset managers focused on private credit,” the report noted.
The FSB warned that these interconnections could magnify market disruptions, particularly given the sector’s elevated leverage and concentration in cyclical industries such as technology, healthcare and services—areas yet to be tested in a prolonged downturn.
It also pointed to a growing reliance on payment-in-kind (PIK) loans among some borrowers, a structure often associated with weakening credit quality as companies defer cash interest payments.
Against this backdrop, the FSB is calling on regulators to intensify supervision across both banks and non-bank lenders. Key priorities include improving risk management standards, enhancing governance frameworks, aggregating exposures more effectively and addressing gaps in loan-level data transparency.
Regulators are also being encouraged to strengthen oversight of valuation methodologies, private credit ratings and liquidity mismatches, particularly as more retail capital enters the market through semi-liquid investment vehicles.
The private credit market—now estimated at between $1.5 trillion and $2 trillion—is heavily concentrated in the U.S., followed by the euro area and the U.K., according to the FSB.
The sector’s rapid growth traces back to the aftermath of the Global Financial Crisis in 2008, when banks retreated from riskier lending segments, creating space for private credit funds and alternative lenders to expand.
While historically focused on mid-sized companies and institutional investors, the market has evolved significantly. Private credit is increasingly financing larger corporations, while retail participation has grown via publicly traded and semi-liquid vehicles—segments that have recently faced redemption pressures in the U.S.
Exposure among European banks is also drawing scrutiny. Barclays reported roughly $20 billion in private credit exposure, while Deutsche Bank disclosed about $30 billion—around 2% of its loan book. BNP Paribas said its exposure stands near $25 billion, or approximately 3% of total lending.
Regulators are increasingly alert to the risks. Both the European Central Bank and the Bank of England have recently warned about potential systemic threats stemming from private credit.
The Bank of England has begun conducting stress tests in collaboration with market participants. Deputy Governor Sarah Breeden recently highlighted concerns around asset quality, valuation discipline and liquidity management—key fault lines that could emerge under financial strain.
