Both the Bank of England and the Federal Reserve have recently trained their sights on private credit as a source of mounting financial stability risk — and their warnings, taken together, paint a sobering picture of a market that has grown large, complex and largely untested by genuine stress.
The scale of the shift is striking. Over the past ten years, the bank share of corporate lending decreased from 48% to 29% in 2025, with the private credit market now accounts for about US$1.4 trillion in the United States alone
Globally, the picture is equally dramatic. Global private-market assets under management are estimated to have risen around six-fold since the low-rate era began in 2008/9, to roughly US$18 trillion by 2025, and critically, as Bank of England Deputy Governor Sarah Breeden noted in her 17 April speech, given at the HLS-PIFS Symposium, “They have not yet been tested, at that scale and complexity, by a broad-based macroeconomic shock in a higher-rate environment.”
Breeden’s concerns centre on the structural vulnerabilities the sector carries into any such test. Transparency is more limited, valuations may lag reality, and underwriting standards have weakened. Leverage is a layer cake, at the borrower, fund and sponsor level, making it hard to measure.
The consequence, she argued, is that in a stress scenario, Akerlof’s “markets for lemons” problem could take hold: when investors struggle to distinguish between good and bad risks, they price the worst case, meaning sound borrowers can end up paying “bad-firm” prices simply because, under stress, it is hard to differentiate. Early warning signs are already visible — a series of defaults including MFS, Tricolor and First Brands Group has reinforced concerns, while redemption pressures have risen in a number of international retail private-credit funds.
The Federal Reserve’s vice chair for supervision, Michelle Bowman, speaking on 8 May, approached the same terrain from a regulatory angle. She flagged that the current capital framework has created perverse incentives.
“Banks receive a more favourable treatment for lending to private credit funds than for lending directly to creditworthy corporations,” she noted.
This effectively subsidises intermediation over direct lending. She also highlighted a transparency problem that hampers oversight: the current industry code for ‘Other Financial Vehicles’ includes hedge funds, private equity funds, private credit funds, BDCs, special purpose entities, and asset-backed security issuers, without further distinction, making it extremely difficult to assess concentration risks or interconnectedness.
Both officials acknowledge that private credit serves legitimate purposes. But the shared message is clear: a sector that has swelled in size and complexity during benign conditions carries risks – opacity, leverage, weak underwriting and deep connections to the regulated banking system – that could amplify any future shock considerably.
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