Private Credit: The $2 Trillion Market That Replaced Bank Lending

Over roughly fifteen years, a substantial share of corporate lending moved out of the banking system. It did not disappear. It moved into investment funds, where it is negotiated privately, held rather than traded, and valued by model rather than by market.

That market now runs into the trillions, and in May 2026 the Financial Stability Board published a report on its vulnerabilities and asked national regulators to look harder at it.

What it actually is

A mid-sized company needs financing. Historically it would approach a bank, or issue bonds into the public market.

In private credit, it borrows instead from an investment fund. The loan is negotiated bilaterally. It is not rated by the major agencies in most cases, not listed, and not traded. The fund typically holds it until it matures.

The money in those funds comes from pension schemes, insurers, sovereign wealth funds and increasingly from wealthy individuals through vehicles designed to give retail-adjacent access.

Why it grew

Three forces, all of them rational at the individual level.

Banks retreated. Capital rules introduced after the financial crisis made certain kinds of corporate lending more expensive to hold on a bank balance sheet. Banks stepped back from parts of the market, and the demand for credit did not go away with them.

Borrowers preferred it. A private lender can move faster than a syndicated bank process, offer terms tailored to the situation, and keep the transaction confidential. For a company owned by a private equity firm pursuing an acquisition, speed and discretion have real value.

Investors wanted yield. A prolonged period of very low interest rates pushed capital toward anything offering a higher return, and private credit offered a premium - partly for taking credit risk, partly for accepting that the investment cannot be sold quickly.

None of this is improper. It is a straightforward reallocation of an activity to where it could be done more cheaply.

What supervisors are concerned about

The FSB's report identifies several things, and they are worth separating because they are different problems.

Opacity. These loans are not publicly traded, so there is no market price and limited public disclosure. Supervisors reviewing the sector have found the data available to them incomplete, which makes it hard to know the size and distribution of exposures.

Valuation. Without market prices, holdings are valued using models. Models involve assumptions, assumptions involve judgement, and judgement made by the party whose performance is being measured is a well-understood conflict. In public markets a deteriorating loan is repriced by traders. In private markets it is repriced when someone decides to reprice it.

Default measurement. Headline default rates in the sector have been low. Whether they reflect the underlying condition of borrowers is disputed, and payment-in-kind is central to that dispute.

Interconnection. This is the one that turns a sector question into a stability question.

Payment-in-kind, and why it complicates the numbers

A payment-in-kind arrangement lets a borrower add interest to the outstanding principal rather than paying it in cash.

There are legitimate reasons to structure a loan this way, agreed openly at the outset - a company investing heavily now, with cash flows expected later.

It also has a second use. A borrower that cannot pay cash interest is in difficulty. If the loan permits interest to be capitalised instead, that borrower does not default. The loan continues to accrue, the fund continues to report income it has not received, and the difficulty does not appear in the default statistics.

The debt grows the whole time. The problem is deferred rather than resolved, and it is deferred in a way that makes the aggregate numbers look calmer than the underlying situation.

This is why estimates of the sector's true default rate vary so widely depending on methodology, and why supervisors have focused specifically on how these arrangements are disclosed.

The connections that matter

If private credit funds were self-contained, losses would fall on the investors who chose the exposure, which is how markets are meant to work.

They are not self-contained.

Banks lend to the funds. Having stepped back from lending directly to companies, banks lend substantial sums to the funds that lend to those companies instead. The exposure is one step removed rather than removed.

Insurers hold the loans. Life insurers in particular have increased allocations to private credit, attracted by the yield and by favourable capital treatment where instruments carry investment-grade ratings. The IMF has separately warned that leveraged private credit instruments held by insurers could produce losses larger than their capital treatment implies under stress.

Retail access is widening. Vehicles offering periodic liquidity against illiquid underlying assets have a structural mismatch - the fund promises more liquidity than its holdings can deliver if many investors ask at once.

Each connection is manageable alone. The FSB's point is that they have not been assessed together, because no single supervisor sees the whole picture.

What this does not say

It does not say private credit is a crisis waiting to happen. Regulators have not said that, and the sector has so far absorbed a substantial rise in interest rates without disorder.

Direct lending has genuine advantages: patient capital, lenders who know their borrowers, and no forced selling into a falling market because there is no market to sell into. Some of what looks like opacity is the absence of the daily mark-to-market volatility that public credit suffers.

The concern is narrower and more specific: a large, fast-growing, model-valued market with limited disclosure, connected to regulated banks and insurers, in which the standard early-warning indicator - the default rate - may be less informative than it appears.

What to watch

FSB and central bank financial stability reports, which now cover the sector in detail and are published free.

Bank disclosures of lending to non-bank financial institutions, in quarterly filings.

Insurer allocations to private and illiquid assets.

Payment-in-kind income as a share of fund income, where disclosed. Rising PIK is the clearest sign that reported returns are being earned on paper rather than in cash.

The bottom line

Private credit is what happened to corporate lending after regulation made it expensive for banks. It has been useful to borrowers and profitable for investors, and it has grown faster than the disclosure around it.

Supervisors are not warning of collapse. They are saying that a market this large, valued by model, connected to banks and insurers, should be better understood than it currently is - and that the numbers most people quote about its health may not mean what they appear to.

This article is educational and is not financial advice. The value of investments can fall as well as rise.