The fast-growing private credit industry’s deepening links with traditional banks and asset managers create risks to the global financial system, the global Financial Stability Board watchdog said on Wednesday, warning some broader measures showed upwards trends of defaults.
Signs of some underlying stress are emerging across private credit – typically lending to mid-sized companies by non-banks – including rising defaults, while a lack of transparency is posing challenges for regulators and investors alike, the watchdog said in its “Vulnerabilities in Private Credit” report.
It singled out the “retailisation” of private credit – particularly in the United States where funds are marketed to wealthy retail investors – as a potential amplifier of risk.
“Interconnectedness between private credit and insurers has also increased, with the FSB estimating that around 10% of life insurer portfolios may be in private credit, against around 3% for non-life insurers.”
The FSB, which coordinates financial regulation for the world’s major economies, valued the overall private credit market at between $1.5 trillion and $2 trillion using 2024 data. The Alternative Investment Management Association puts it higher at $3.5 trillion.
The private lending sector has grown rapidly since the 2007-2009 financial crisis partly due to tighter bank regulation, according to the report, but the recent collapse of some borrowers in the U.S. and UK have left creditors nursing losses and heightened worries about poor underwriting standards.
Europe’s largest bank HSBC became the latest this week to report an unexpected $400 million loss linked to the collapse of British-based mortgage lender Market Financial Solutions.
“The private credit ecosystem is increasingly characterized by deepening interconnections between asset managers, banks, insurers and private equity firms,” said John Schindler, FSB Secretary General.
“Default rates, though still moderate, are rising. When we include broader measures, such as selective defaults and distressed exchanges, the picture becomes more concerning,” he added.
Despite recent growth aggregate bank exposure remains small, at less than 0.5% of total bank assets, the FSB said in its report.
Schindler flagged areas for further work, including improving transparency and data gaps, scrutinizing liquidity mismatches and sharing best approaches between regulators.
Rising Retail Participation
The FSB pointed to growing retail participation in the sector, noting retail share of assets under management has climbed from virtually zero to around 13% in the past decade.
Schindler warned that the expansion of open-ended and “semi-liquid” vehicles – products that attract retail money – may introduce liquidity mismatches, where funds offer periodic redemptions while holding long-dated, illiquid assets, an issue that was less likely when private credit was the preserve of institutional investors.
Private credit managers KKR, Apollo, BlackRock and Blue Owl have all limited retail investor redemptions in recent weeks as investors exit.
Concentration is another concern. The FSB said five large asset management groups account for about one-third of aggregate loan commitments across the entire private credit and private equity industry.
Interconnectedness between private credit and insurers has also increased, with the FSB estimating that around 10% of life insurer portfolios may be in private credit, against around 3% for non-life insurers.
(Reporting by Phoebe Seers, editing by Iain Withers, Tommy Reggiori Wilkes and Aurora Ellis)
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