Private Credit Risks Alarm Global Regulators

The world’s financial regulators are warning that the explosive growth of private credit is creating new vulnerabilities across the global financial system as banks, insurers, private equity firms, and asset managers become increasingly interconnected through the sector.

In a new report titled “Vulnerabilities in Private Credit,” the Financial Stability Board warned that signs of stress are beginning to emerge within the fast-growing market, including rising defaults, deteriorating underwriting standards, and growing concerns over transparency.

Private credit, which typically involves non-bank lenders providing financing to mid-sized companies, has expanded rapidly since the 2007 – 2009 financial crisis as tighter banking regulations pushed more lending activity outside traditional banking channels.

The Financial Stability Board estimated the global private credit market was worth between $1.5 trillion and $2 trillion in 2024, although industry groups place the figure substantially higher.

“The private credit ecosystem is increasingly characterised by deepening interconnections between asset managers, banks, insurers and private equity firms,” said John Schindler.

Schindler warned that although headline default rates remain moderate, broader indicators of stress are becoming more concerning.

“Default rates, though still moderate, are rising,” he said. “When we include broader measures, such as selective defaults and distressed exchanges, the picture becomes more concerning.”

The warning comes amid mounting investor concerns following several high-profile borrower failures in both the United States and Britain, which have exposed weaknesses in underwriting quality and risk controls within parts of the private credit sector.

This week, HSBC disclosed an unexpected $400 million loss linked to the collapse of British mortgage lender Market Financial Solutions, adding to concerns over the sector’s growing fragility.

While the FSB noted that direct bank exposure to private credit remains relatively limited at less than 0.5% of total banking assets, regulators warned that indirect exposure across the broader financial ecosystem is becoming increasingly complex.

Writing separately in the Financial Times, Andrew Bailey said the growing web of financial connections deserves closer scrutiny.

“These multiple layers of leverage across the ecosystem deserve deeper scrutiny,” Bailey wrote.

One of the watchdog’s biggest concerns is the rapid “retailisation” of private credit markets, particularly in the United States, where private credit products are increasingly being marketed to wealthy retail investors rather than institutional buyers alone.

According to the FSB, retail investors’ share of private credit assets under management has risen from almost zero to approximately 13% over the past decade.

Regulators fear that the increasing popularity of open-ended and semi-liquid investment structures could create dangerous liquidity mismatches because investors may be allowed to redeem funds periodically while the underlying loans remain long-dated and illiquid.

Several major investment firms, including KKR, Apollo Global Management, BlackRock and Blue Owl Capital, have recently limited investor redemptions from private credit products amid rising withdrawal requests.

The FSB also highlighted growing concentration risk within the industry, noting that five large asset managers now account for roughly one-third of total loan commitments across both private credit and private equity markets.

Connections between private credit and the insurance sector are also intensifying. The watchdog estimated that approximately 10% of life insurers’ portfolios are now invested in private credit compared with roughly 3% for non-life insurers.

Regulators are now calling for greater transparency, stronger data collection, improved liquidity oversight, and better coordination of supervisory practices globally as they seek to prevent stress within private credit markets from spreading more broadly across the financial system.

Although regulators stopped short of describing private credit as an immediate systemic threat, the report signals growing concern that the sector’s rapid growth may be outpacing the ability of both investors and supervisors to fully understand the risks building beneath the surface.