Private credit is unlikely to be a standalone systemic risk today but its growing links with banks and non-banks financial institutions is prompting increased scrutiny. The question for supervisors is whether risks can still be clearly identified, monitored and stress-tested across the wider financial system. This article will explore how risks could materialise and how supervisors are addressing potential vulnerabilities from private credit.
The FSB estimates private credit at $1.5 to $2 trillion globally, with the largest market being the United States (around $1 trillion) followed by the euro area and the United Kingdom (UK). The market has grown since the 2008 financial crisis as banks refrained from less liquid lending, including leveraged loans and SME financing, leaving space for non-bank lenders to offer financing outside of the banking system. After the financial crisis, credit intermediation did not disappear, but it moved outside of the banking sector, toward non-bank and private market channels.
Experience revealed that fast-growing, opaque and interconnected markets can become transmission channels under stress, particularly when leverage and valuation uncertainty are not fully visible. Looking back at the financial crisis, the interconnectedness and lack of transparency of derivative markets amplified shocks. Archegos’ fall-out recalled how hidden leverage and interconnections with non-bank institutions could generate significant stress transmission through financing links, collateral calls and counterparty exposures. Following the recent collapses of First Brands, Tricolour and PrimaLend, similar concerns are emerging and triggering increased supervisory focus on the private credit market.
Although supervisors’ concerns range from opaque valuation to increased leverage and lower underwriting standards, they also recognise the benefits of a dynamic private credit market. Private credit funds channel investment to innovative firms more easily than banks, which in the context of Artificial Intelligence and other frontier technology competition is strategic to facilitate development of new technologies and support growth. The ECB also recognised that a dynamic private credit market supports the Savings and Investment Union and could become an important source of funding for AI-related firms[1]. Therefore, concerns should not be overstated as private credit’s positive role in diversifying corporate funding is also widely recognised by supervisors.
Private credit has become an increasingly important part of the financing landscape. The challenge now is to preserve its benefits while improving visibility over the interconnections, valuation risks and liquidity pressures that could amplify stress.
Gregory Marchat Partner - Group Financial Services Leader
The Financial Stability Board’s recent report on Vulnerabilities in Private Credit underlines the growing supervisory focus on this fast-expanding market. Since 2019, the US private credit market has seen a threefold increase. The sector’s average annual growth in the euro area was 13% over the past decade and 17% in the UK over the past five years[2]. As a result, this rapid expansion has made it increasingly relevant with regulators focusing on understanding how stress could propagate into the banking sector. This interlinkage has warranted the scrutiny of supervisors globally but also more specifically in the United Kingdom (UK) and the European Union (EU).
In practice, private credit involves a network of banks and non-banks participants, including asset managers, banks, institutional investors and private equity firms. This means that private credit and banks work alongside each other’s, in the same financing structure with private credit supplying longer-term loans and banks providing revolving facilities and ancillary services. At the same time, interlinkages between banks and private credit markets are challenging to assess as the indirect channels are not always visible. Indeed, banks are connected to private credit funds via financing arrangements, credit lines, investments in private credit collateralised loan obligations, synthetic risk transfer (SRT) instruments and strategic partnerships with asset managers.
This is particularly relevant in Europe and the UK. Post-2008 prudential reforms made some credit activities less attractive for banks, contributing to their migration into private credit and other NBFI channels. As private credit continues to grow, supervisors need to understand risks that sit outside banks but can still transmit back to them.
Against this backdrop, regulators are increasing scrutiny over these interlinkages as they make banks and other private credit actors vulnerable to correlated stresses. Despite relatively low direct exposure, with banks’ direct lending to private credit firms being less than 0.5% of total bank assets, supervisory concerns increased over opacity and potentially growing indirect exposure. The ECB identifies underestimation of banks’ exposures to private credit markets as a main source of concern in its Financial Stability Review.
The FSB report highlights the lack of borrowers’ public ratings and the concentration in B-rated borrowers in the market, warning of weaker underlying credit quality of borrowers. It additionally reports upward default rate trend and increased reliance on payment-in-kind loans. In parallel, the ECB warns that a contagion channel across asset classes is developing as non-banks are exposed to public debt of the same borrowers as those they are exposed to in the private credit space.
These early warning signs have triggered increased supervisory discussions on the topic, including on reducing opacity, addressing data gaps and working on a harmonised definition of private credit. The key considerations are on understanding how exposures are interconnected and how correlations could lead to losses including in stress scenarios. In the United Kingdom, this growing focus is already being translated into supervisory work through the Bank of England’s System-wide Exploratory Scenario.
Private credit is not in itself a source of systemic risk. However, it has become a clear supervisory focus in recent years as the market grows and interlinkages with banks remain opaque. Banks should assess their exposures to private credit comprehensively to be prepared for more demanding supervisory scrutiny.
Eric Cloutier Partner - Global Head of Banking Regulations
The Bank of England’s second System-wide Exploratory Scenario SWES will focus on how the private markets ecosystem operates under stress. The exercise aims to understand how banks and non-bank financial institutions active in private markets would respond to a downturn, and whether their interactions could amplify stress across the financial system. Sarah Breeden described the aim of the exercise as to “look to apply an economic stress to this complex set of interconnections in order to try to drive through and understand where the losses might arise as part of that.”[3]
The exercise focuses on PE-sponsored UK corporates, credit originated to finance these corporates, including leveraged loans and high-yield bonds, and broader private credit to the UK corporate sector. The 46 participating firms include alternative asset managers, asset managers, banks and institutional investors such as insurers and pension funds.
The exercise is conducted throughout 2026 and the final report with the results is expected in 2027. The scenario analysis phase began in June 2026 and is based on a five-year severe global macroeconomic recession. Participants are modelling portfolio impacts and behavioural responses under stress, including from trade fragmentation, inflationary pressures, AI-driven valuation shocks and higher energy costs that could limit near-term productivity gains from AI.
The July Financial Stability Report reports results from the information gathering stage of the SWES[4] It notes that a large share of private market assets are managed by alternative asset managers who are providing funding mainly to smaller and mid-sized firms, Private credit financing is particularly concentrated in the technology, business services, healthcare and consumer sectors. While most private credit funds are closed-ended, around a quarter use open-ended structures with periodic redemption rights and liquidity management tools. The next stages of the SWES will explore dynamics in stress.
The BoE is an early mover in understanding how banks and NBFIs could respond to a downturn and how stress may transmit across the financial system. The exercise is meant to be a new form of stress-test tool designed for changing market structures. Its final findings, expected for the first half of 2027, are likely to lead regulators to adapt their approach to private markets and inform future supervisory expectations.
This focus on stress transmission is also reflected in the ECB simulated scenarios on the private credit sector, including the risks surrounding second-round valuation losses and contagion across leveraged loans. The ECB warns that a negative shock in private credit loan portfolios would trigger adverse market reactions in response that could create sizeable valuation losses.
The results of the SWES are likely to guide future supervisory and regulatory activity in the UK, but it could also trigger reaction in the EU and at a broader international level.
So far, the FSB report has not pointed to the need for immediate regulatory action or to the development of a specific regulatory framework for non-banks. Although supervisors are closely watching the development of the sector, the current position is that private credit should not be as strictly regulated as banks. Andrew Bailey recently recalled that while banks have money as liabilities, private credit firms have investments, which carries different consequences in case of a crisis, and should be reflected in a different degree of regulatory requirements.
The SWES marks an important shift toward system-wide stress analysis. Even where direct exposures to private credit are limited, supervisors will expect firms to evidence how indirect links, counterparties and funding channels could behave under stress.
Huseyin Sahin Partner - Banking Risk Consulting
The growth in private credit can be partially analysed as the result of the widening difference in regulatory treatment between the banking sector and private credit. The expansion of the capital and liquidity requirements for the banking sector after the financial crisis led to the migration of certain types of lending from banks to private credit funds. Indeed, the tighter bank rules made credit intermediation more costly and could have incentivised banks to lend to private markets rather than directly to companies.
This structural shift could be explained by the relative advantage of private credit over banks since the strengthening of banking regulation. Private credit is better positioned to provide long-term capital for assets that can be too costly for banks balance sheets, considering prudential constrains. After the financial crisis, credit intermediation did not disappear, but it moved outside of the banking sector, toward non-bank and private market channels.
This raises a strategic question for supervisors. Should private credit be seen as a symptom or a consequence of the post-crisis regulatory framework, it could then trigger a different regulatory response from authorities. If post-2008 banking regulation is seen as having pushed credit intermediation into less transparent channels, then the supervisory answer could be different. In that case, authorities may consider whether some parts of the regulation place excessive constraints on banks’ balance sheet and revisit those to incentivise lending activities to migrate back into the banking sector instead of regulating non-bank financial sector.
The FSB report reflects the current point of convergence of supervisors regarding private credit: the focus is on increased monitoring and exploring addressing data challenges. The report’s conclusions do not lead to evidence on further convergence on supervisory or regulatory action, suggesting each jurisdiction will eventually move forward with its own agenda and method.
The increasing role of retail investors and the shift in structures of financial instruments available in private credit markets are additional shifts justifying reinforced scrutiny from authorities. Indeed, retail investors can purchase Exchange-Traded Funds (ETFs) and other registered investment companies that invest in private credit. Retail investors can also invest in private credit markets via institutions such as pension plans.
The increased retailisation has been accompanied by a shift of private credit funds’ structure. While private credit funds have typically been structured as closed-end vehicles, which to some extent mitigate liquidity mismatches, the recent shift towards vehicles offering redemption options, such as semi-liquid investment vehicles, has heightened concerns about liquidity pressures.
In the euro area, open-ended private credit funds amount to 20%, with 75% of them allowing monthly or more frequent redemptions options. In the UK, this risk is mostly mitigated because most funds align redemption terms with the liquidity profile of the underlying assets. In the US, the share of assets under management accounted for by retail investors climbed from 0 to 13 % in the last 10 years[5], mostly through public Business Development Companies (BDCs) and registered investment companies. The share of traded BDC assets under management has grown from less than $50 billion in 2014 to almost $150 billion in 2022.
Perpetual BDCs increasingly offer partial and periodic liquidity windows. In the EU and the UK, this trend remains low, but it is growing. The concern here is that private credit is inherently illiquid, mostly because of uncertainty around asset valuation. Offering vehicles with periodic liquidity windows can therefore create a liquidity mismatch if redemption requests rise sharply. Recent redemption pressures in retail-focused semi-liquid private credit vehicles have illustrated how these structures can be tested when investors seek to exit at the same time. The surges in redemption requests have forced some funds to cap withdrawals after the increased in exit requests. This is additionally reinforced by the risk that retail investors do not fully understand the illiquidity of those assets, which could amplify redemption pressure under stress conditions. Under stress, this could test redemption limits and other liquidity management tools, put valuations under pressure, and amplify losses or broader market stress.
Private credit does not constitute a standalone systemic risk, but its scale, opacity and growing interconnections mean it can no longer be treated as peripheral to financial stability. Supervisors are moving towards closer monitoring, sharper data collection and more system-wide analysis of transmission channels.
As private credit comes under greater supervisory scrutiny, the immediate focus is on vulnerabilities stemming from interlinkages between non-banks and the banking sector in the private finance ecosystem. In the EU and the UK, supervisors are focused on mapping and interconnections and potential systemic spillovers, while improving their understanding of the private credit ecosystem. In the US, the debate extends to whether post-crisis bank regulation itself helped shift credit intermediation into less transparent non-bank channels.
While supervisors are looking at how best to monitor risks and address early vulnerabilities, banks are increasingly warning against the outsourcing non-bank supervision to them, as they do not possess the mandate, the data or the visibility to act as de facto NBFI oversight mechanisms.
The next debate will focus on whether future supervisory tools address where the risks reside. The results of the BoE SWES will be closely watched to determine how supervisors may approach private credit-related vulnerabilities and system-wide stress transmission, across banks, asset managers and institutional investors.
[1] European Central Bank, Financial stability review “Stress in global private credit markets and its implications for euro area financial stability”, May 2026
[2] Financial Stability Board, Report on Vulnerabilities in Private Credit, May 2026
[3] Sarah Breeden, Oral Evidence at the Financial Services Regulation Committee, 21 October 2025
[4] Financial Stability Report - July 2026
[5] Financial Stability Board, Report on Vulnerabilities in Private Credit, May 2026, p 9
Supervisors are concerned because private credit increasingly involves both banks and non-banks through financing arrangements, credit lines, investments, SRT instruments and strategic partnerships, making the transmission of stress harder to monitor. Even where banks’ direct exposures appear limited, opacity and indirect links could amplify losses across the financial system under stress.
The FSB estimates the global private credit market at $1.5 trillion to $2 trillion, with the United States representing the largest market at around $1 trillion.
The Bank of England is using its second System-wide Exploratory Scenario (SWES) to examine how banks and non-bank financial institutions active in private markets would respond to a severe downturn. The exercise, running through 2026 with results expected in 2027, is likely to inform future supervisory expectations.
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