The Financial Stability Board will assess vulnerabilities in private finance and liquidity mismatches in private credit funds, map the ecosystem and consider supervisory discussions, as well as looking at how to address data challenges. 

Concerns about private credit and loans have not abated since Tricolor and First Brands went under last year, with investors pulling out of funds, leading to numerous gatings. When JPMorgan Chase chair and CEO Jamie Dimon warned that more “cockroaches” would come out, it did nothing to calm nerves. However, in a recent shareholder letter he later claimed that “private credit probably does not present a systemic risk”. 

Regulators, central bankers and finance ministers in the G20 are not so sure. In a report published on Wednesday, the FSB now warns about vulnerabilities in private credit arising from the rapid growth of the market to about $1.5tn to $2tn (£1.1tn to £1.5tn) amid leverage, a lack of granular data, and growing interconnectedness. 

The international body sees asset managers, insurers, pension funds and banks at the heart of the private credit ecosystem, with complex and layered interlinkages. These multiple connections “can potentially lead to difficult-to-detect pockets of risks”, the FSB said on Wednesday.  

For example, insurers are investors in private credit, but they are also indirectly exposed through asset-intensive or funded reinsurance arrangements. Meanwhile, private equity firms are increasingly taking stakes in or directly owning insurance companies, which in turn engage in private credit lending. In the UK, the Prudential Regulation Authority recently started consulting on stricter capital requirements for funded reinsurance, citing the need to protect pension policyholders.

The FSB also warns that “leverage in private credit exists at multiple and varying levels, including within the portfolio companies, private credit funds, at the sponsor level, and investor financing. This layering effect may amplify losses during market stress.”  

Investors have traditionally accessed private credit via closed-ended funds, but the FSB notes the growing use of open-ended funds “in certain jurisdictions” as a risk for liquidity mismatches. Open-ended funds include Long-Term Asset Funds, which were created in the UK to allow defined contribution schemes exposure to illiquid assets. Open-ended funds are also sometimes used to give retail investors access and periodic liquidity.  

While private credit can appear self-contained, the FSB says the complexity of funding structures could create “spillover risks to the banking system during stress events”. It cites private credit funds’ reliance on bank credit lines for liquidity, which could shift pressures to banks – especially when corporate borrowers draw on revolving credit lines – with high leverage in private equity deals potentially magnifying losses.  

“Investors, such as insurers and pension funds, with exposures to both asset classes may face capital calls, potentially forcing them to sell liquid public assets,” the FSB said, arguing that “significant interlinkages and market opacity could increase the risk of correlated stresses”.

The warning about private credit could make for uncomfortable reading for UK ministers, who have just signed into law that they and their successors could, between 2028 and 2032, compel pension funds to invest up to 10% in private markets, including private credit and private equity – with some saying this could lead to market distortions.

Advisers to UK pension schemes remain sanguine on private credit risks. PwC argued that stress is largely concentrated in retail‑focused structures, rather than the senior, secured closed‑end strategies typically held by DB pension schemes. 

“While manager‑specific issues and isolated UK cases have attracted attention, most DB exposures are diversified, in run‑off, and unlikely to be directly impacted,” the firm said. Risks relating to AI disruption “appear sector‑specific”, it added.  

However, the firm cautioned that “additional scrutiny is warranted where schemes are considering new run‑on commitments, or where DC sections or Long-Term Asset Funds (LTAFs) may have exposure to more vulnerable structures”.  

Asset manager Schroders revealed at the end of April that it will continue to be negative on corporate bonds: “With spreads tight, there is little buffer against rising volatility and increasing private credit risks.”