Global Watchdog Urges Tighter Scrutiny of Private Credit Sector

Key facts

• Financial Stability Board calls for enhanced regulatory supervision of private credit.
• The private credit sector is estimated to be worth between $1.5 trillion and $2 trillion globally.
• Tech, healthcare, and services are the largest borrowing sectors, with AI companies prominent.
• AI accounted for over a third of private credit deals in 2025.
• FSB highlights risks from complex funding structures and opaque data.
• Banks have $220 billion in drawn and undrawn credit lines to the sector, potentially higher.
• Two US auto companies, Tricolor and First Brands, collapsed due to private credit issues.
• published on a Wednesday.

Global Watchdog Sounds Alarm on Private Credit Risks

A global finance watchdog has issued a stark warning regarding the burgeoning private credit sector, urging national regulators to intensify their oversight. The Financial Stability Board (FSB) points to the industry's intricate lending structures and a pervasive lack of transparent data as significant vulnerabilities that could ripple through broader financial markets. This call for stricter supervision comes amid growing unease about the sector's rapid expansion and its increasing entanglement with traditional financial institutions. The FSB's comprehensive study, released on a Wednesday, underscores the potential risks posed to banks, insurers, and asset managers. highlights concerns over opaque valuation practices and complex funding vehicles that obscure the true extent of exposure. The interconnectedness of private credit with established financial players through credit lines, revolving facilities, and strategic partnerships amplifies these worries. This intensified scrutiny reflects a growing recognition of private credit's systemic importance and the potential for distress within its nearly $2 trillion market. The sector's boom, particularly in the years following the 2008 Global Financial Crisis, saw private lenders fill a void left by retreating investment banks, but this growth may now be outpacing robust risk management.

Opaque Data and Complex Structures Fuel Vulnerabilities

A core concern for the FSB is the private credit industry's deficiency in standardized and transparent data. This opacity, coupled with complex funding arrangements, makes it difficult for regulators and market participants to accurately assess risk. notes that while banks have $220 billion in drawn and undrawn credit lines to the sector, commercial data suggests this figure could be double. These linkages, though representing a small fraction of banks' total capital, carry amplified risks. The FSB points to the financing of riskier fund portfolios, banks providing credit to companies also borrowing from private lenders, and increasing partnerships between banks and asset managers focused on private credit. Such arrangements can magnify market stress, especially given the sector's high leverage. also flags the increasing use of payment-in-kind loans by some private credit borrowers, a practice that can signal deteriorating credit conditions. The concentration of this high leverage in sectors like technology, healthcare, and services means that a prolonged economic downturn could test the industry's resilience in ways it has not yet experienced.

AI Boom Fuels Sector Growth, Poses Unique Risks

The private credit industry's role in financing the current artificial intelligence boom is a particular focus of the identifies technology, healthcare, and services as the primary sectors drawing on private credit, with AI companies increasingly turning to these lenders for substantial infrastructure investments, such as data centres. In 2025 alone, the AI industry represented over a third of all private credit deals, a significant jump from 17% in the preceding five years. However, this intense focus on specific, rapidly growing sectors like AI introduces idiosyncratic risks. The FSB warns that a sharp correction in asset valuations, which have surged dramatically, could lead to substantial credit losses for private credit investors. Such a downturn could be triggered by disruptions in electricity supply, critical for data centre operations, leading to project delays or cancellations. Furthermore, an oversupply of data centres driven by current investments, if it outpaces demand for AI services, could depress investor returns. This scenario highlights the potential for a feedback loop where ambitious funding fuels rapid asset growth, which then becomes vulnerable to market shifts and supply-demand imbalances.

Borrower Profiles and Traditional Bank Exposure

Unlike traditional banks, which rely on customer deposits, private credit firms lend using investor money, operating largely outside the conventional regulated banking system. While proponents argue for their enhanced risk monitoring capabilities and bespoke loan arrangements, the FSB's findings present a different picture. indicates that private credit borrowers typically exhibit lower credit scores and carry larger debts compared to those seeking loans from traditional banks. This distinction is crucial as traditional banks themselves are becoming increasingly exposed to the private credit sector. This exposure comes through direct lending to private credit funds, financing riskier fund portfolios, or providing capital to companies simultaneously indebted to private lenders. A growing number of banks are also entering into partnerships with asset managers for private credit deals. This growing entanglement exposes banks to an opaque market where lenders may possess only partial borrower information, a vulnerability underscored by recent corporate failures. The FSB cited the 2023 collapse of two US automotive companies, Tricolor and First Brands, which were backed by private credit. Allegations of fraud in these cases raise questions about the leniency of private credit lenders in their due diligence.

Regulatory Recommendations for Enhanced Supervision

In response to these identified risks, the FSB's board is advocating for national regulators to significantly bolster their supervision of the private credit industry. This includes fostering a greater exchange of supervisory approaches concerning risk management and governance for both banks and non-bank institutions involved in private credit. Key areas for enhanced scrutiny include the aggregation of exposures, the methods used for valuation, and the reliance on private ratings. The FSB also stresses the need to address the issue of patchy loan-level data and to strengthen oversight of liquidity mismatches within private credit funds. By implementing these recommendations, regulators aim to build a more resilient private credit ecosystem that can withstand economic volatility without posing systemic threats. The goal is to bring greater transparency and standardization to a sector that has grown rapidly and become deeply integrated into the global financial architecture.

Market Impact and Future Outlook

The concerns raised by the FSB have already contributed to a surge in withdrawals from some private credit funds, with certain entities forced to cap client redemptions. This reaction highlights the fragility of investor confidence in a sector characterized by its less regulated nature and the potential for significant losses. Banks such as JP Morgan and Barclays experienced losses following the collapse of Tricolor, while substantial exposures to the failures of both Tricolor and First Brands. These incidents serve as concrete examples of how distress in the private credit market can directly impact traditional financial institutions. sets the stage for a period of increased regulatory attention and potential reform within the private credit landscape. As the sector continues to evolve, the challenge will be to balance its innovative capacity and its role in providing essential financing with the imperative of maintaining financial stability and protecting investors from undue risk.

The bottom line

• The Financial Stability Board is urging regulators worldwide to increase oversight of the private credit market due to growing risks.
• Opaque data, complex structures, and high leverage in private credit pose vulnerabilities to banks, insurers, and asset managers.
• The booming AI sector, a major borrower of private credit, faces potential 'sizeable' losses if valuations correct sharply.
• Private credit borrowers often have weaker credit profiles than those accessing traditional bank loans.
• Traditional banks are increasingly exposed to private credit through direct lending, partnerships, and financing companies that borrow from both.
• Recent corporate collapses linked to private credit, like Tricolor and First Brands, have led to losses for some major banks.