The Financial Stability Board (FSB), an international body that monitors the global financial system, has issued a warning about vulnerabilities facing the booming private credit sector.

The global private credit industry has grown rapidly, particularly in the US, UK and EU, with total lending in the sector estimated between $1.5 trillion and $2 trillion at the end of 2024.

While this growth brings benefits, the FSB report says, it also creates new vulnerabilities including complex interlinkages with banks, borrower credit quality concerns and valuation opacity.

The report says the market is still untested in a situation of prolonged economic downturn. The high leverage and concentration in specific sectors, particularly technology, healthcare and services, creates a risk that firm or sector-specific shocks turn into broader market stress.

The interlinking of the relatively unregulated private credit sector with banks adds additional risk. The report notes that the private credit ecosystem involves a range of bank and nonbank participants, including asset managers, institutional investors and private equity funds.

Banks are interconnected to these private credit funds through financing arrangements and strategic partnerships. The report says that available data suggests that direct bank lending to private credit funds is relatively small, but uncertainty about the exposure is large.
Data collected from FSB members captures around $220 billion of drawn and undrawn credit lines, but estimates from commercial data suggest the amounts could be more than twice as large, the report says.

Banks are also indirectly exposed to private credit in a range of ways, including lending to companies that are simultaneously borrowing from private credit funds and their growing use of synthetic risk transfers to offload credit risk to private credit funds.

The lack of exact data concerning these exposures makes it difficult to assess the potential impact of a private credit shock on wider lending. This opacity itself creates further risks, the FSB says.

Another source of opacity in the market is the lack of publicly available ratings for private debt and the subsequent growing use of private ratings agencies to facilitate investment by ratings-related firms such as insurers. Available evidence could mean that borrowers in the market typically have lower credit quality and higher leverage than those in comparable public markets, the report says.

In response to these risks, the FSB encourages authorities to address data challenges, including those related to the lack of granular fund and loan-level data, deepen analysis of the interlinkage of private credit with private equity and insurers and to share supervisory approaches for risk management across jurisdictions.

Private credit has been under increasing scrutiny in recent months. In April, the US Federal Reserve asked major banks in the country to detail their exposure to private credit just weeks the Treasury US did the same for insurance regulators. In March, regulators in the UK and US opened probes into private-credit linked firms.

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