Private credit's AI lending boom poses financial stability risk, watchdog warns
The Financial Stability Board has warned that private credit firms' heavy exposure to AI financing could trigger significant losses if valuations correct sharply. The global watchdog, which monitors financial authorities across 24 countries, found that AI companies now account for more than a third of private credit deals in 2025, up from 17% over the previous five years.
Private credit firms lend investor money directly to companies, operating outside the traditional regulated banking system. AI firms have increasingly turned to these lenders to fund datacentres and infrastructure as traditional banks have grown more cautious.
Where the risk lies
The FSB identified two specific vulnerabilities. A shortage of electricity could delay or cancel datacentre projects, triggering immediate losses. An oversupply of datacentres could also undermine returns if demand for AI services fails to materialise as expected.
"This focus on specific sectors may leave private credit funds exposed to idiosyncratic risks," the FSB said in its report. The board warned that a "sharp correction in asset valuations, which have increased rapidly, could lead to sizeable credit losses."
Private credit borrowers typically have lower credit scores and larger debts than companies using traditional banks, according to the FSB analysis.
Banks caught in the exposure
Traditional banks have become entangled in private credit's risks. They lend directly to private credit funds, finance riskier portfolios, and increasingly partner with asset managers on deals. Banks now hold exposure to an opaque sector where they "may have only partial information about borrowers," the FSB said.
The collapse of two private credit-backed automotive companies last year illustrated the danger. Tricolor and First Brands both failed, with fraud allegations later emerging against both firms. JP Morgan and Barclays reported losses from Tricolor's collapse, while UBS and Jefferies disclosed significant exposures to the failures.
"How tightly integrated banks can be in the intricate web of exposures in corporate credit" became clear through these cases, the FSB noted.
Broader sector concerns
Recent withdrawals from private credit funds have forced some to limit how much money clients can pull out, signalling growing investor anxiety over the sector's health. The FSB's warning adds to those concerns and suggests regulators are watching private credit's role in the AI boom closely.
For finance professionals, understanding private credit exposure-both direct and indirect-has become essential. AI for Finance resources can help teams assess how AI investments are being financed and what risks those structures pose. Finance executives may also benefit from AI Learning Path for CFOs, which covers financial risk assessment in the context of emerging technologies.
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