Research from the Boston Federal Reserve warns that increasingly close ties between traditional banks and the private credit industry may pose systemic risks to the U.S. financial system during an economic downturn.
The private credit market has expanded dramatically from $46 billion in 2000 to approximately $1 trillion in 2023, with particularly rapid growth after 2019. Boston Fed economists José Fillat, Mattia Landoni, John Levin, and Christina Wang noted that “the extensive connections between banks and the private credit market may be concerning, as these connections indirectly expose banks to high risks associated with private credit loans.”
The phenomenon represents regulatory arbitrage following the 2008 financial crisis. After banks were restricted from directly providing high-leverage loans, they began funding private credit funds engaged in such lending, effectively circumventing strict banking regulations. Rating agency Fitch reported that bank loans to non-bank financial institutions, including private equity firms and private credit funds, surged to approximately $1.2 trillion as of March 2025, representing a 20% year-over-year increase.
The primary risk stems from revolving credit lines banks provide to private credit investment funds, allowing funds to withdraw hundreds of millions or billions of dollars to underwrite private business loans. The Boston Fed warned that “if enough private credit lenders withdraw bank credit lines, their reliance on bank liquidity may pose a systemic liquidity risk to the banking industry.”
While the Fed acknowledged that current bank financing to private credit funds remains safer than pre-2008 leveraged buyout loans—supported by dozens or hundreds of smaller loans rather than single large exposures—the credit lines represent funds’ “most senior liabilities,” meaning banks would only incur losses under “severely adverse economic conditions, such as a deep and prolonged recession.”
