The global Financial Stability Board (FSB) warned that the rapid expansion of private credit and its growing ties to traditional banks, insurers and large asset managers could pose risks to the financial system. The FSB set out its concerns in a report titled "Vulnerabilities in Private Credit," released on Wednesday, noting that some broader measures indicate upward trends in defaults.
Private credit - typically defined as non-bank lending to mid-sized companies - has expanded substantially in recent years. Using 2024 data, the FSB estimated the overall market at between $1.5 trillion and $2 trillion, while the Alternative Investment Management Association places the figure higher at $3.5 trillion. The report links part of that growth to regulatory changes after the 2007-2009 financial crisis.
Signs of strain are emerging within the sector. The FSB highlighted rising defaults and other indicators of stress among borrowers, noting that recent collapses of some borrowers in the United States and the United Kingdom have left creditors with losses and have intensified concerns about underwriting standards.
Europe’s largest bank, HSBC, reported an unexpected $400 million loss this week connected to the demise of British-based mortgage lender Market Financial Solutions, an example the FSB used to illustrate the potential for spillovers.
Interconnectedness and concentration
John Schindler, the FSB Secretary General, described the private credit ecosystem as increasingly entwined with traditional financial institutions. "The private credit ecosystem is increasingly characterised by deepening interconnections between asset managers, banks, insurers and private equity firms," he said. He added that while default rates remain moderate, they are on the rise. "Default rates, though still moderate, are rising. When we include broader measures, such as selective defaults and distressed exchanges, the picture becomes more concerning," Schindler said.
Despite these worries, the FSB noted that aggregate bank exposure to private credit remains relatively small, at under 0.5% of total bank assets. Still, the watchdog flagged that concentration among large asset managers is a potential amplifying factor: five major asset management groups are responsible for roughly one-third of aggregate loan commitments across the private credit and private equity industry.
Retail participation and liquidity mismatches
The FSB called attention to the "retailisation" of private credit, particularly in the United States where funds are marketed to wealthy individual investors. Over the past decade, the retail share of assets under management in private credit has climbed from virtually zero to around 13%, according to the report. Schindler warned that the growth of open-ended and "semi-liquid" vehicles - structures that attract retail capital - could create liquidity mismatches when those vehicles promise periodic redemptions but hold long-dated, illiquid loans.
Recent market behavior has underscored that risk: several private credit managers, including KKR, Apollo, BlackRock and Blue Owl, have recently restricted retail investor redemptions as some investors sought to exit.
Insurers and other exposures
The FSB also pointed to growing links between private credit and the insurance sector. It estimated that about 10% of life insurers' portfolios may be allocated to private credit, compared with around 3% for non-life insurers. The report identified gaps in transparency and data, and recommended further work on enhancing disclosure, addressing liquidity mismatches and sharing supervisory approaches among regulators.
In its report, the FSB did not propose new numerical estimates beyond those already cited but set out a program of work to tackle the identified vulnerabilities. The watchdog emphasised that limited transparency in the sector makes it harder for both regulators and investors to assess risks and exposures accurately.