In a recent paper, my co-authors and I examined the balance sheets of private credit funds. To this end, we used one of the most comprehensive datasets available, covering more than 1,200 funds and nearly 9,000 underlying loans, representing roughly two-thirds of the US market by assets.
The data tell a simple story: these funds are not banks. They are typically financed with long-term capital and substantially more equity — often 65%–80% — than traditional lenders, and they do not rely on pay-on-demand deposits or large-scale maturity transformation. As a result, they are far less prone to the kind of runs that defined the 2008 financial crisis.
Our data also show where anxiety is actually concentrated. Large, long-horizon funds financed with locked-up capital account for most of the market, and this institutional core is relatively insulated from liquidity stress. By contrast, the redemptions, gating and discounts are largely confined to smaller segments, including semi-liquid vehicles and business development companies. In other words, the pressure is building in the part of the market that closely resembles asset management, rather than banking.
This does not mean the risks are trivial; they take a different form than is often assumed. The central vulnerability in private credit is opacity, not traditional leverage. Because assets are not continuously priced, valuations depend on models and periodic transactions. When uncertainty increases — whether because of higher interest rates, weaker borrowers, or technological disruption — confidence in those valuations can shift quickly.
See also: Private credit under the spotlight
Systemic stress, in turn, manifests not through sudden withdrawals but through shifts in beliefs about asset value. Even without realised losses, valuation shifts can tighten financing conditions and quietly reduce the supply of credit.
Changing perceptions of asset values do not remain confined to private funds. A growing share of private credit is ultimately held, directly or indirectly, by insurers and affiliated vehicles. Over the past decade, large private equity sponsors have acquired or partnered with insurers, using their balance sheets as stable funding sources for long-dated assets. In the US, these institutions are primarily overseen by state regulators, often with limited visibility into system-wide exposures.
At the same time, banks remain connected to private-credit markets through credit lines, financing arrangements, and shared borrowers. The result is a system in which credit risk is spread across private funds, insurers, and banks, each operating under different regulatory frameworks. This is not a market failure, but a supervisory blind spot.
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Warsh and others have argued that the Fed should be less involved in directing credit outcomes. While that instinct is understandable, a smaller footprint requires better visibility. With risks migrating beyond the banking system, a central bank focused primarily on banks might miss where financial stress is building.
That said, extending banking-style regulation to private credit is not the answer. These institutions serve an important function, and their higher equity buffers are a feature, not a flaw. Instead, the challenge facing policymakers is to ensure that as risk moves, oversight keeps pace. Doing so requires understanding how exposures link banks, private funds, and insurers, and stress-testing those links before markets do.
Even where direct exposures are limited, as in much of Europe, the effects may not remain local. A shock to the US private-credit system would likely reverberate globally through funding markets and investor portfolios.
None of this suggests that private credit will trigger a 2008-style financial crisis. But while the structure of the private-credit market makes it more resilient than deposit-funded banking, resilience in one dimension can create vulnerability in another. As the investor base broadens (particularly through vehicles that offer periodic liquidity), and exposures migrate onto insurance balance sheets, risks can accumulate in parts of the system not designed to absorb rapid valuation changes.
Ultimately, maintaining financial stability depends less on who originates the loan than on whether risks can be traced. If confirmed, Warsh will face difficult choices on inflation and growth. But he will also confront a quieter challenge: updating the Fed’s tools for a system in which a growing share of credit is created outside the traditional banking sector.
While the Fed may not need a broader mandate, it will need a clearer view of emerging risks. The next episode of financial stress is unlikely to begin where policymakers are looking, and it will not wait for them to catch up. — © Project Syndicate
Amit Seru is professor of finance at the Stanford Graduate School of Business and a senior fellow at the Hoover Institution
