The Financial Stability Board's (FSB) Report on Vulnerabilities in Private Credit finds that supervisors cannot consistently measure bank exposures, fund-level leverage or insurer participation in a market the FSB estimates at between $1.5 trillion and $2 trillion globally at end-2024. Rising redemption pressures and deteriorating borrower credit quality compound the concern.

Private credit has largely operated through closed-end structures that lock up capital for the life of a fund. In the United States, perpetual non-traded business development companies (BDCs) and other semi-liquid vehicles now offer periodic redemption windows, typically quarterly, to attract retail investors. In the euro area, around 20% of private credit funds are open-ended, with approximately 75% of those allowing monthly or more frequent redemptions. The UK market shows similar movement toward semi-liquid and evergreen fund structures.

Private credit loans are long-dated, bilateral and largely illiquid. A fund promising quarterly liquidity while holding multi-year term loans to mid-sized unrated companies is a structural tension the FSB argues authorities have insufficient data to monitor.

Redemption limits tested in early 2026

In early 2026, several private credit funds received redemption requests exceeding their stated withdrawal limits. For some funds, the stated limit is 5% of NAV per quarter. Cliffwater's $33 billion private credit fund saw redemptions reach 14% of NAV. BlackRock and Morgan Stanley restricted withdrawals at their private credit funds after surges in redemption requests. Fund managers used existing structural caps to contain outflows, but the FSB notes the episode may have accelerated further redemption pressure rather than dampening it.

Despite required disclosures, retail investors may not fully understand the illiquidity of the underlying assets, the FSB notes. In a stress scenario, that misunderstanding could amplify withdrawal requests at exactly the point when asset sales are most expensive.

The insurer and pension fund layer

Insurance companies and pension funds are the dominant limited partners in private credit globally. The FSB cites funded reinsurance as a growing channel of indirect exposure, with insurance liabilities transferred through such arrangements projected to grow materially over the coming decade, particularly in the UK and Asia.

The IAIS, in its 2025 Global Insurance Market Report, estimates private credit exposures below 5% of insurance sector total assets for most jurisdictions, though data quality varies. A proxy using private placements and private ratings suggests around 10% of life insurer portfolios may be private credit, against around 3% for non-life insurers.

Private equity firms acquiring life insurers and reinsurers adds another layer. In the United States, PE-backed insurers now control nearly $900 billion in insurance liabilities, up from $67 billion in 2012, with 35% of new US annuity sales in 2023 going to PE-backed carriers. These insurers tend to hold a higher concentration in structured securities — approximately 27% of their portfolios by end-2024, compared to around 12% for other large insurers, according to BIS analysis cited in the report. In some cases, the structured securities are managed by the PE sponsor itself. The connections between private equity ownership, insurer investment mandates and private credit fund participation span multiple regulatory perimeters and often multiple jurisdictions, the FSB notes, making these risks difficult to detect.

Bank exposures and circles of risk

Direct bank lending to private credit funds appears modest in aggregate, but the data picture is unsettled. FSB member jurisdictions report around $220 billion in drawn and undrawn credit lines, while commercial estimates run between $270 billion and $500 billion. Both figures represent a small share of bank assets and CET1 capital, but the gap between official and commercial estimates is itself a finding: supervisors do not consistently know how much their banks have lent into the sector.

Banks use synthetic risk transfers (SRTs) to offload credit risk on pools of corporate loans, and private credit funds are the largest single buyer of SRT instruments in Europe, ahead of pension funds and insurers. Some of those funds are themselves financed by bank credit lines or repo facilities, sometimes from the same banks. The result is what the FSB describes as "circles of risk", where credit risk the bank believed it had transferred returns to its balance sheet as counterparty exposure to a fund it is funding.

Borrower stress signals are accumulating

Private credit borrowers are concentrated around a single-B credit rating, with approximately 75% having EBITDA below $100 million, according to Fitch data cited in the report. Debt-to-EBITDA ratios run at 5 to 6 times in reported figures, but EBITDA adjustments may put leverage closer to 7 times, according to UBS Credit Research analysis also cited by the FSB. A study of middle-market CLO borrowers drawn from S&P Global Ratings data found 10% lacked sufficient cash flow to cover interest payments.

PIK usage has risen sharply since 2022 and remained elevated. PIK now appears in around 12% of private credit loans, with PIK toggles accounting for roughly half of that. Toggles are associated with a 1 to 2 percentage point increase in the probability of delinquency in the following quarter, on top of an unconditional rate of 3%, according to research on US BDC loans cited in the report. Outright defaults remain low at around 1%, but that figure rises to approximately 5% when selective defaults and distressed exchanges are included, comparable to the US high-yield market.

The First Brands and Tricolor corporate bankruptcies in late 2025 illustrated how interconnections surface only at the point of default. Creditors spanned 11 jurisdictions. Banks lent directly to the failed companies, to private credit funds exposed to them and to investors with their own exposures. Both companies were backed by private equity funds; some insurers had written credit insurance on them.

Data gaps limit what supervisors can actually see

Across almost every dimension the FSB examines, the limiting factor is data. Regulatory frameworks do not specifically identify private credit funds as a category in most jurisdictions. In the EU, the AIFMD framework classifies private credit funds in a residual category with no loan-type granularity. In the United States, private credit funds can be identified in regulatory filings only through name-matching algorithms. Insurers' private credit exposures appear under broader asset classes such as corporate bonds or structured finance, making direct estimation unreliable.

The FSB has proposed a set of core surveillance metrics covering fund size, borrower leverage, redemption frequency, retail versus institutional investor ratios and sector concentration. It has also outlined four areas of further work: assessing interlinkages between nonbanks within the private finance ecosystem, mapping and defining the ecosystem's components, facilitating supervisory discussions across jurisdictions, and addressing data gaps. No timeline has been set for any of these workstreams.