FSB turns spotlight on private credit interconnections

What does this mean?

Banks and private credit

A central theme in the FSB’s analysis is the visibility into links between banks and private credit, rather than the scale of exposures alone. Where private credit lending can be separately identified, direct bank exposures appear modest, at less than 0.5% of bank assets. But the report notes wide uncertainty: member data captures around $220bn of drawn and undrawn credit lines, while commercial estimates suggest exposures could be more than twice as large.

The connections extend beyond direct lending to asset-based finance, such as subscription lines and Net Asset Value (NAV) facilities; partnerships and co-investments; and warehousing arrangements. The FSB also highlights possible "circles of risk" where banks fund private credit vehicles that in turn invest in the same banks' synthetic risk transfers. While recent corporate defaults didn't generate broader market disruption, they showed that some interlinkages only became clear once default occurred - in one case involving creditors across 11 jurisdictions. Some bank lenders, the FSB notes, face challenges aggregating exposures and stress testing more complex positions. The concern is less about current loss levels and more about whether firms and supervisors can fully identify correlated exposures across increasingly complex funding chains.

Borrower credit quality

The FSB identifies several indicators of weaker borrower credit quality in private credit, while emphasising that limited data constrains its assessment. Even so, borrowers are generally smaller than those in public debt markets and appear concentrated around the single-B rating bucket. Average borrower leverage is around 5–6x debt-to-EBITDA, compared with approximately 4x for leverage loans. The FSB also highlights growing use of EBITDA adjustments, which may understate headline leverage and push “true” leverage materially higher.

Other indicators point the same way, including rising use of payment-in-kind (PIK) arrangements and middle-market collateralised loan obligations data showing that around 10% of borrowers lacked sufficient cash flow to cover interest payments. The FSB presents these as indicators to monitor, particularly in a downturn, not evidence of sector-wide distress.

Valuation practices under scrutiny

Valuation practices are a distinct focus for the FSB, reflecting the illiquid nature of private credit assets and their reliance on judgement-based marks. The report notes that quarterly updates may be adequate in normal conditions but less so when markets come under stress. It also recognises the role of governance, valuation committees and third-party input, and acknowledges the industry view that loan protections, tighter covenants and relationship-based restructurings can dampen volatility. This aligns with the FCA's ongoing focus on valuation practices and governance in private markets, including through the findings of its 2025 multi-firm review.

The key question, in the FSB’s view, is whether these safeguards remain effective when conditions deteriorate. Stale valuations - whether perceived or actual - could create first-mover incentives during stress, leading investors to exit a fund before asset values are potentially marked down. Managers may also have incentives to delay or spread the impact of negative shocks. These risks may become more pronounced as retail participation in private credit grows through vehicles such as Business Development Companies (BDC) or Private Credit ETFs, alongside the continued shift towards redemption-enabled fund structures.

The growth of private ratings in some jurisdictions, accompanied by reports of ratings inflation, raises a related concern about how judgement-based inputs perform under pressure.

Data gaps and the supervisory response 

A recurring theme is that authorities' visibility into private credit remains uneven. Regulatory frameworks don’t specifically identify private credit funds, definitions are not harmonised, and granular fund- and loan-level information is limited.

Against this backdrop, the FSB workstream has identified an initial set of core metrics that authorities could use to monitor market developments, with greater global harmonisation viewed as beneficial given the market's cross-border nature. Calculation methodologies and thresholds are left for further work, and monitoring is expected to be proportionate to the materiality of private credit in each jurisdiction. This phased approach is consistent with the report's broader tone. Private credit isn’t presented as a source of current systemic stress, but as a market that remains untested at its present size and scope.

What do firms need to do?

Firms shouldn’t view the FSB report as creating immediate new obligations. Its practical relevance lies in signalling where future supervisory focus may become sharper, especially where private credit exposures intersect banks, funds, private equity sponsors and insurers. 

This is consistent with broader UK regulatory attention to issues such as concentration, counterparty risk and private market interlinkages. The Bank of England's system-wide exploratory scenario (SWES) exercise is one example. The FCA also emphasised the role of confidence, strong first-line controls and joined-up oversight in private markets in a speech by Deputy Chief Executive Sarah Pritchard on 11 May 2026 .

For banks and other financing providers, the emphasis should be on understanding direct and indirect private credit exposures and enhancing risk management frameworks. Firms with material direct or indirect private credit exposure may increasingly be expected to explain how leverage and concentration would behave under stress. This aligns with themes raised in the PRA’s 2024 Dear CRO letter on private-equity linked financing activities and associated derivates exposures, as well as its continued focus on counterparty credit risk management in the PRA 2026/27 Business Plan.

Asset managers and fund operators should concentrate efforts on valuation, credit underwriting and credit-quality monitoring. Supervisors may look for evidence that valuation methodologies remain robust as conditions fluctuate. For UK firms, this ties into the FCA’s focus on reinforcing consistent, high standards across private market investing including risk management capabilities. Insurers and institutional investors with material allocations to private credit may also face greater scrutiny around concentration, valuation reliance and interconnected exposures.

Across the ecosystem firms should also anticipate that the report will feed into data requests and supervisory dialogue, rather than immediate rulemaking. Readiness should be calibrated to materiality, with firms identifying data gaps and ensuring they can give a clear account of their private credit risk profile. Firms may also want to engage early with the FCA on future reforms, particularly where clearer definitions, more consistent reporting or better-tailored requirements could support effective oversight without adding unnecessary burden.

Next steps

The FSB’s work on private credit will continue, with further focus on interconnectedness, liquidity mismatches, supervisory coordination and data gaps. In the UK, firms should also watch for the FCA’s focused supervisory work on risk management in private markets, alongside updates on the Bank of England’s private market SWES over the course of 2026.