The Financial Stability Board on Tuesday published a report on vulnerabilities in the private credit market and its interlinkages with banks, sizing the global sector at between $1.5 trillion and $2 trillion and highlighting a range of risks that warrant closer supervisory attention.
The report is part of the FSB's action plan on non-bank financial intermediation, an area that has moved up the international regulatory agenda as more credit provision has migrated outside the traditional banking system.
LEVERAGE AND LIQUIDITY IN FOCUS
The report highlights leverage, liquidity mismatches, concentration and cross-border interconnectedness as key vulnerabilities in the private credit sector, according to the FSB's announcement. It flags the connections between private credit funds and banks, insurers and private equity firms as channels through which stress could be transmitted across the financial system.
Leverage inside private credit funds and at the level of borrower companies has become a particular focus of supervisors, as has the potential mismatch between the illiquid nature of private loans and the redemption profiles of some vehicles that hold them.
The report also notes data gaps that hinder monitoring of the sector, a point the FSB has raised in a series of previous publications on non-bank finance. Reliable and comparable data on private credit exposures remains patchy across jurisdictions, complicating efforts to assess systemic risk.
MARKET SIZED AT $1.5 TO $2 TRILLION
The FSB estimates the global private credit market at between $1.5 trillion and $2 trillion, capturing loans made by non-bank lenders directly to companies, typically outside the traditional syndicated loan market. The estimate reflects the significant growth of the asset class over the past decade, driven by investor demand for yield and by tighter bank capital requirements.
Interconnectedness with banks arises through several channels, including credit lines extended by banks to private credit funds, warehouse financing arrangements and shared exposures to underlying borrowers. Insurers and private equity firms also play major roles in the ecosystem.
The report is part of the FSB's broader programme of work on non-bank financial intermediation, an agenda that has grown in prominence since the global financial crisis and the subsequent expansion of market-based finance. Successive episodes of stress in non-bank markets have reinforced the case for stronger monitoring and, where necessary, targeted policy responses.
The Basel-based body noted in its release that the analysis would inform further work by international standard-setters and national authorities. For banks, the report is likely to sharpen supervisory dialogue on their linkages with private credit funds and on the risk-management frameworks that govern those exposures.
Private credit's rapid expansion has become a defining feature of post-crisis financial markets, and its interlinkages with more traditional intermediaries have deepened significantly. The FSB's decision to publish a dedicated report on the sector reflects the extent to which policymakers are now treating private credit as a distinct area of systemic focus rather than a niche adjacent to bank lending.
Chief executives of major banks have increasingly been asked by investors and analysts about their exposure to private credit, and the FSB report will provide a common reference for those conversations. The publication also offers a framework that national regulators can draw on when calibrating their own supervisory approaches to the sector.