Private Credit's AI Lending Boom Poses Systemic Risk, Watchdog Warns
The Financial Stability Board warned that private credit firms' heavy exposure to AI companies could trigger "sizeable" losses if valuations fall sharply, potentially destabilizing the broader financial system.
The FSB, 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. These loans fund datacentres and infrastructure for the sector's rapid expansion.
Where the Risk Concentrates
Healthcare, services, and tech sectors dominate private credit borrowing. This concentration leaves lenders exposed to industry-specific shocks that could hit multiple borrowers simultaneously.
The FSB identified two specific threats to AI lending. A shortage of electricity-essential for datacentre construction and operation-could delay or cancel projects outright. An oversupply of datacentres could also depress returns if capacity exceeds demand for AI services.
Either scenario could force asset write-downs across private credit portfolios that have grown rapidly without traditional bank oversight.
Weaker Borrowers, Opacity Compounds Risk
Private credit borrowers typically carry lower credit scores and larger debt loads than companies using traditional banks, the FSB said. Yet private credit lenders operate outside the regulated banking system, using investor money rather than customer deposits.
Banks have become entangled in this sector anyway. They lend directly to private credit funds, finance their portfolios, and extend credit to companies that simultaneously borrow from private lenders. Some banks now partner with asset managers on deals.
This integration creates what the FSB called "an intricate web of exposures." Banks may have only partial information about borrowers, as recent corporate failures demonstrated.
Recent Failures Expose Lending Gaps
Two private credit-backed automotive companies, Tricolor and First Brands, collapsed last year. Both now face fraud allegations. JP Morgan and Barclays suffered losses on Tricolor's failure, while UBS and Jefferies reported significant exposures to both bankruptcies.
The failures showed how tightly integrated banks are with the private credit sector-and how little visibility they may have into underlying risks.
Concerns over private credit lending practices have already prompted action. Multibillion-pound withdrawals from some private credit funds forced managers to cap client redemptions, signalling investor worry about asset quality and liquidity.
Advocates argue private credit lenders monitor risks more closely than traditional banks and tailor loan terms to individual borrowers. The FSB report suggests that argument faces a credibility test as the sector's concentration in AI intensifies.
AI for Finance professionals should understand how these credit dynamics affect their organisations' risk exposure and balance sheet decisions.
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