Private Credit Boom Threatens Stability, Says Global Watchdog

Private credit, representing lending by nonbank entities to companies, has in recent years come to rival traditional bank lending in size and influence. According to the U.S. Federal Reserve, private credit outstanding has roughly doubled over the past five years. At the same time, many firms — especially midsize businesses or those without easy access to public markets — now rely heavily on private credit funds for financing.

PYMNTS Intelligence recently polled 60 company executives at U.S. middle-market firms (annual revenues between $100 million and $1 billion) and found that half of “stable” middle-market companies now view credit as growth capital rather than a last resort.

That same work revealed that although traditional bank loans remain the dominant source of funding, companies with steady operations are increasingly open to alternative financing, including embedded lending offered via technology or payments platforms, reflecting a shift in how middle-market firms assess and pursue capital.

This dramatic growth has increased the appeal of private credit as a flexible funding source for borrowers and a yield-rich alternative for investors. But the expanding footprint of these nonbank lenders has created new layers of complexity and interconnection between traditional banks, private credit funds and end borrowers.

Looking Towards a Regulatory Framework

The Financial Stability Board (FSB) was created after the 2008 crisis to coordinate global efforts among central banks, regulators and international bodies to preserve financial stability.

In a letter late last month to G20 leaders, FSB Chair Andrew Bailey highlighted the rapid rise of nonbank financial intermediaries,  including private credit markets, and flagged them as a focus area for 2026 oversight work.

The letter called for regulatory frameworks to be modernized to keep pace with structural changes in finance, balancing the need for innovation with the imperative of stability.

By putting private credit on its agenda, the FSB signals that global regulators may soon push for more standardized data collection, reporting and possibly limits on leverage or interconnected exposures.

The FSB warned that stablecoins, especially those used for cross-border transactions, also require “robust frameworks” to prevent regulatory arbitrage and ensure they do not threaten global financial stability.

Among the risks the FSB highlighted are the speed of private credit’s expansion, the lack of transparency around direct lending deals, and the growing entanglement between private credit funds, banks and the broader financial system.

Moreover, banks have increasingly become liquidity providers to private credit funds: recent data show growing volumes of bank credit lines and term loans extended to business-development companies (BDCs) and private debt funds, per the Fed. In a downturn, defaults on those underlying private credit obligations could cascade back to banks, threatening financial stability.

Firms in payments or broader banking that have relied on private credit to fund lending, balance sheet growth or expansion may now face a shifting regulatory environment. As the FSB and its members begin to scrutinize private credit, firms could be required to provide more transparency into their funding sources, report exposures, stress-test for downturns, or even maintain higher capital or liquidity buffers … similar to the rules that govern traditional banks.

Deal structures may have to evolve: private credit providers may demand reduced leverage on their side or impose covenants to shield funds against widespread defaults.

A timely example is Blue Owl Capital, a publicly traded private credit firm whose stock slumped sharply after a high-profile planned merger of two of its private credit funds was terminated.  The market reaction underscored how fragile valuations and liquidity can be in private credit vehicles.

Private credit is no longer a niche corner of finance. As nonbank lending expands and increasingly interweaves with banks, insurers and FinTech firms, the risks posed by opaque exposures and shifting funding channels become a systemic concern. Data from the Fed show that bank loan commitments to nonbank financial institutions have surged, making the nonbank sector a substantial part of bank portfolios.

If a sharp economic downturn, rising interest rates or refinancing shock triggers defaults in private credit, the fallout could ripple broadly, from private firms to funds, to banks and beyond.