The most consequential transformation in finance over the past decade did not happen on a trading floor or a meme-stock forum. It happened in private, in the form of a lending market that swelled to somewhere between $1.5 and $2 trillion while most of the public was looking elsewhere. In May, the Financial Stability Board issued a formal warning about vulnerabilities in private credit and urged national regulators to tighten supervision. They are right to be nervous, and the rest of us should be too.
A banking system without the banking rules
Private credit grew up in the spaces banks retreated from after 2008. When regulators made traditional lending more expensive and more scrutinized, the demand for capital did not disappear; it migrated to funds that could lend without the same disclosure, the same capital buffers, or the same supervision. That migration was sold as a feature: capital reaching borrowers banks would not serve, risk moving off taxpayer-backed balance sheets and onto sophisticated investors who knew what they were buying.
Some of that is true. But a $2 trillion market that operates largely outside the regulatory perimeter is not a niche; it is a parallel banking system. And we have learned, expensively, what happens when credit intermediation grows faster than the visibility into it.
The warning signs are already blinking
The detail from the FSB's review that should give everyone pause is this: roughly 40% of private credit borrowers now have negative free cash flow, up from about 25% in 2021. That means a growing share of these loans are extended to companies not currently generating enough cash to cover their operations, on the assumption that growth or refinancing will bail them out. In a benign environment, that assumption holds. In a downturn, or simply in a higher-for-longer rate world, it is exactly the kind of bet that unwinds violently.
- Opaque valuations. Private loans are marked by the funds that hold them, not by a live market. Stress can hide for quarters.
- Liquidity mismatch. Some vehicles offer investors more liquidity than the underlying loans can possibly provide.
- Private ratings. Reliance on ratings produced for the deal raises uncomfortable echoes of 2008's structured-credit machinery.
- Interconnectedness. Banks lend to the funds that lend to the borrowers, so the risk never fully left the regulated system.
The defense, and why it isn't enough
Defenders of private credit make a fair point: the sector is generally less leveraged than the subprime mortgage complex was, and its investors are institutions with long lock-ups rather than depositors who can run overnight. A fund cannot suffer a classic bank run if its capital is contractually locked up for years. That structural patience is genuinely stabilizing, and it is why I do not expect private credit to be the trigger of the next crisis.
But amplifier and trigger are different roles. The danger the FSB identifies is not that private credit ignites the fire, but that its opacity, leverage, and interconnectedness make any fire harder to see and harder to contain. When valuations are stale and exposures are aggregated nowhere, regulators discover the size of the problem only after it has already metastasized.
What sensible oversight looks like
The answer is not to strangle a market that does real economic work. It is to demand the basics that any systemically important activity should provide: loan-level data so supervisors can aggregate exposures, honest and independent valuation practices, scrutiny of liquidity mismatches, and a clear map of how the funds connect back to the banks. None of that kills the model. It simply ensures we are not flying blind into the next cycle.
The recurring lesson of financial history is that risk does not vanish when it leaves the regulated core; it relocates and waits. Private credit is where a great deal of it now lives. The watchdogs have finally said so out loud. The question is whether we listen before the next downturn forces the conversation for us.
This article is opinion and analysis based on publicly reported regulatory findings. It is not investment advice.