The Real Risks of Private Credit to Banks

*This article appears in the third quarter 2026 issue of Bank Director magazine.

Private credit has emerged from the shadows of finance to making headlines for all the wrong reasons. Spooked investors are withdrawing their capital from the leading private credit funds, which are responding by freezing redemptions.

The Securities and Exchange Commission and Department of Treasury are conducting investigations. Practically every public bank needs at least one private credit slide in their investor deck.

So, what is the risk to banks if private credit devolves into a crisis? Here are four risks outlined in order of seriousness.

1. Banks experience direct losses from loans secured by private credit funds.
Banks have a total of $1.32 trillion in loans to nondepository financial institutions (NDFIs). Banks with more than $10 billion in assets hold nearly all this exposure, according to third quarter 2025 data from the Federal Deposit Insurance Corp.

Bank loans secured by private credit lending vehicles essentially fall into three intermediary categories, including business credit intermediaries and consumer credit intermediaries. About 85% to 90% of mortgage credit lending is tied to loans secured by agency mortgages and is low risk. Let’s focus on the other two categories, which total a modest $422 billion.

In their first quarter investor presentation, Bank of America Corp. noted its private credit advance rates were 70% to 75% with concentration limits and, most notably, asset-by-asset approval rights, which allow banks to exclude riskier loans from the advance rate. That means the advance rate is likely even lower, as those loans are not worth zero. With a guaranty on at least the fund structure, losses are not experienced except under highly adverse scenarios.

Take an example of a $100 million pool comprised of 100 $1 million commercial real estate loans. Let’s say five of those loans were liquidated at a recovery rate of 50%, resulting in a loss of $2.5 million if a bank made those loans on its balance sheet. However, if it loaned $70 million to a private credit lender, only the private credit lender would experience losses.

The recent headlines highlighting losses in private credit have often been related to fraud. For instance, federal prosecutors say Tricolor Holdings had double-pledged lendable assets to multiple lenders.

In short, given the favorable subordination structure of most private credit loans originated by banks, I believe direct losses on private credit loans represent a low to moderate risk to banks.

2. Banks lose their biggest engine of loan growth.
NDFI loans have been the straw that stirs the drink for bank loan growth for over a decade, and no category comes close to its compound annual growth rate of 21.9%.

If NDFI lending treads water or collapses, banks will have a more difficult time growing loans, although a shift from private credit to bank loans could offset some of this risk. Some analysts have argued that robust first quarter commercial and industrial loan growth for banks was due to private credit issues, but we could not find any evidence of that.

Especially for the banks with large private credit exposures, the risk of slowing growth is moderate to high.

3. Private credit will no longer bail banks out of bad deals.
Following the financial crisis of 2007-09, bank credit losses have been very low while private credit has grown substantially. This is not a coincidence but a likely correlation. From talking to chief credit officers and workout professionals at banks, private credit lenders have refinanced many tough credits, some of which could have resulted in substantial losses otherwise. Or private credit provided the leverage to enable the sale of the company and/or assets.

If private credit volume drops considerably, I fully expect bank losses on problem loans to increase significantly.

4. Contagion causes a cascading drop in values.
The recent problems in the office sector are a good example as bank’s exposure to office is far less (estimated at 10% to 15% of CRE) than, say, commercial-mortgage backed securities (approximately a third). As large CMBS loans and private credit lenders liquidate office loans, values are plunging and causing stress on bank portfolios. Investors that acquire office buildings, for example, for as much as 90% less than peak valuations can undercut other buildings in rents and force bank loans into default.

Since the financial crisis, the banking regulators have constantly been worried about contagion and what it might do to values elsewhere. Contagion can be both direct, with a borrower having issues with a private credit loan, or indirect.

In short, shrapnel from a private credit bust will hit banks, but risks will be more indirect than direct.