A global watchdog says the market is deeply interconnected, largely opaque, and completely untested
Private credit has never faced a real crisis, and regulators are increasingly worried about what happens when it does.
The Financial Stability Board warned Wednesday that the US$1.5tn to US$2tn private credit market is developing vulnerabilities that could ripple through the broader financial system, flagging rising defaults, opaque valuations and a wave of retail money flowing into a market built for institutional investors.
FSB secretary general John Schindler said default rates, though still moderate, are rising — and the picture becomes “more concerning” when broader measures like selective defaults and distressed exchanges are included.
Outright default rates remain low at approximately 1 percent, but IMF and S&P Global data cited in the report show that figure climbs to around 5 percent when selective defaults are included — on par with the US high-yield market.
Leverage sits at 5–6x debt-to-EBITDA according to UBS Credit Research, and growing use of EBITDA adjustments may push true leverage closer to 7x.
Payment-in-kind loans, which allow borrowers to defer cash interest by adding it to the principal, now appear in approximately 12 percent of loans and have roughly doubled since 2022.
A separate analysis of middle-market CLO borrowers found that 10 percent lacked sufficient cash flow to cover interest payments.
BIS research cited in the report that retail investors' share of private credit assets under management climbed from virtually zero to about 13 percent over the past decade.
The shift toward semi-liquid structures — which offer periodic redemptions while holding long-dated, illiquid assets — is what concerns regulators most.
Bloomberg reported that in early 2026, wealthy investors sought to pull about US$20bn from private credit funds but were only able to redeem about half,
Funds managed by BlackRock and Morgan Stanley restricted withdrawals as redemptions surged, Reuters reported, while according to Bloomberg the Cliffwater private credit fund saw redemption requests reach 14 percent of its US$33bn in assets.
Bank of Canada governor Tiff Macklem, who oversees the FSB's top risk committee, said earlier this year that “private credit is not suitable for everybody” and pointed to a potential need for additional “guardrails” so retail investors properly understand the constraints on accessing their cash.
Direct bank lending to private credit funds looks manageable on paper — FSB member data captured around US$220bn in drawn and undrawn credit lines, less than 0.5 percent of total bank assets.
But commercial data suggest the true figure could be more than twice as large.
FSB chair Andrew Bailey wrote in the Financial Times Wednesday that while direct bank exposure may be limited, indirect connections are “extensive.”
Roughly half of companies borrowing from private credit funds also carry revolving credit facilities with banks, creating overlapping exposures.
In late 2025, corporate defaults at First Brands and Tricolor illustrated the risk: hidden leverage and off-balance sheet financing left creditors — spread across 11 jurisdictions — with insufficient information until bankruptcy.
Around 10 percent of life insurers' portfolios may be in private credit, versus roughly 3 percent for non-life insurers.
Private equity-backed insurers in the US now control nearly US$900bn in insurance liabilities — up from US$67bn in 2012 — with 35 percent of new US annuity sales in 2023 going to PE-backed firms, the Bank of England reported.
The FSB flagged multiple layers of leverage as a distinct vulnerability: at the borrower, fund, sponsor and investor levels simultaneously.
Valuations, typically conducted quarterly with significant managerial discretion, may delay loss recognition during stress.
Smaller, lesser-known credit rating agencies have also gained ground providing private ratings, accompanied by reports of ratings inflation.
The FSB said private credit “remains untested at its current size and scope” and that a severe downturn could expose all of the above at once.
It plans further work on nonbank interlinkages, liquidity mismatches, supervisory coordination on valuation practices and private ratings, and closing data gaps — including the absence of harmonised definitions and granular loan-level data across jurisdictions.
The FSB's report draws on data from Canada, the euro area, Hong Kong, South Africa, Switzerland, the UK and the US.
