By Phoebe Seers
LONDON, May 6 (Reuters) – The fast-growing private credit industry’s deepening links with banks and asset managers are creating risks for the world’s financial system, a global watchdog said on Wednesday, warning that some broad measures point to rising defaults.
Signs of underlying stress are emerging across private credit – typically lending to mid-sized companies by non-banks – including higher defaults, while a lack of transparency is complicating oversight for regulators and investors, the Financial Stability Board said in its “Vulnerabilities in Private Credit” report.
It flagged the “retailisation” of private credit – particularly in the U.S. where funds are increasingly marketed to wealthy retail investors – as a potential amplifier of risk.
Using 2024 data, the FSB estimated the private credit market at $1.5 trillion to $2 trillion, though the Alternative Investment Management Association puts it higher at $3.5 trillion.
The sector has expanded rapidly since the 2007–2009 financial crisis, partly because of tighter bank regulation, but recent borrower collapses in the U.S. and Britain have left creditors with losses and heightened concerns over weak underwriting standards.
Europe’s largest bank HSBC this week reported an unexpected $400 million loss linked to the collapse of British mortgage lender Market Financial Solutions.
“The private credit ecosystem is increasingly characterised by deepening interconnections between asset managers, banks, insurers and private equity firms,” said FSB Secretary General John Schindler.
“Default rates, though still moderate, are rising. When we include broader measures, such as selective defaults and distressed exchanges, the picture becomes more concerning,” he added.
Despite recent growth, aggregate bank exposure remains small, at less than 0.5% of total bank assets, the FSB said.
Writing in the Financial Times on Wednesday, FSB Chair Andrew Bailey said that while direct bank exposure to funds may be limited, indirect connections are “extensive”.
“These multiple layers of leverage across the ecosystem deserve deeper scrutiny,” Bailey said.
The FSB flagged areas for further work, including improving transparency and closing data gaps, assessing liquidity mismatches and sharing best regulatory practices.
RISING RETAIL PARTICIPATION
The watchdog highlighted growing retail participation, with retail investors’ share of assets under management rising from virtually zero to about 13% over the past decade.
Schindler warned that the spread of open-ended and semi-liquid products – designed to attract retail money – could create liquidity mismatches, as funds offer periodic redemptions while holding long-dated, illiquid assets.
Private credit managers KKR, Apollo, BlackRock and Blue Owl have limited retail investor redemptions in recent weeks as outflows increase.
The FSB also flagged concentration risks, noting that five large asset managers account for about one-third of total loan commitments across private credit and private equity.
Interconnections with insurers have also increased, with around 10% of life insurers’ portfolios estimated to be in private credit, compared with around 3% for non-life insurers, the FSB said.
(Reporting by Phoebe Seers, Editing by Tommy Reggiori Wilkes, Aurora Ellis and Mark Potter)
