Fed Scrutinizes Banks as Private Credit Exposure Surges

Fed officials have visited JPMorgan, Wells Fargo, Barclays and Morgan Stanley since the spring to assess their lending to private credit firms, according to people familiar with the reviews.

The examinations have included questions about total exposures, risk management and the quality of collateral supporting loans.

The Fed and the four banks declined to comment.

The scrutiny was prompted partly by JPMorgan’s decision in March to mark down significant portions of loans linked to private credit portfolios, particularly exposures involving software companies potentially threatened by artificial intelligence.

The Fed has reportedly completed its review at some institutions, including JPMorgan.

Such examinations are not unusual. The Fed regularly conducts on-site assessments and monitors emerging risks across supervised banks.

However, the review comes as connections between traditional banks and the rapidly expanding private credit industry attract increasing regulatory attention.

Bank lending to nonbank financial institutions has risen from around $300 billion in 2016 to more than $1.5 trillion, according to Federal Deposit Insurance Corporation data cited in the original report. It now represents approximately 11% of outstanding bank lending.

That growth illustrates an important shift following the 2008 financial crisis. As tighter regulation constrained banks’ direct participation in riskier lending, private credit firms expanded into the space.

Banks have subsequently regained indirect exposure by financing those lenders, often using private credit portfolios as collateral.

The resulting interconnectedness is attracting attention internationally. The European Central Bank has expanded its examination of banks’ private credit exposures, while the Bank of England said following its September Financial Policy Committee meeting that private credit could prove vulnerable to deteriorating financial conditions.