Banks should go on the front foot as private credit crisis plays out
Rupak Ghose
Private credit mishaps are coming at us with such speed and intensity that many of the stories are blurring into one. But rather than the private credit crisis dragging banks down, it might give them an opportunity to play offensively in this space.
Over the past 12 months, the average share price of big US banks is up 25%, while listed private markets giants are down 33%. Although the share prices of the former have drifted lower in 2026, and European banks have fared worse, they have still performed much better than the listed private markets players.
Some of that performance has been driven by banks financing nonbank financials. Lending to private credit funds was among the fastest-growing part of investment banks’ operations and provided a higher return on equity than lending directly to leveraged and smaller companies.
Yes, we’ve all seen the blowups and the comments from the likes of Jamie Dimon and Lloyd Blankfein about risks hiding in the private credit world. Indeed, this month JP Morgan started to mark down the value of software loans sitting in its private credit clients' portfolios, thereby reducing the amount of leverage it makes available to them.
And we’ve seen how private credit has been forced into a series of high-profile asset markdowns – with some going from 100 cents on the dollar to zero in a matter of weeks – and a series of major firms’ funds seeing large redemption requests from retail clients, often above their quarterly limits.
Yet despite the headlines around private credit’s high exposure to software businesses at the centre of the AI storm, the overall default rate for underlying borrowers remains low – so far – even if the widespread and increasing use of payment-in-kind notes by struggling borrowers suggests that the underlying default rate is much higher.
Useful data
In that context, new data from the US Office of Financial Research is useful – and suggests it is not yet time to panic. The OFR estimates that total (ie, global) bank and nonbank lending to private credit, including business development companies, is somewhere between US$410bn and US$540bn.
Moody’s, meanwhile, estimates that US banks’ private credit exposure, including CLOs, is US$300bn, with virtually all of that concentrated in the top 10 banks.
The numbers are big – and have grown rapidly – but they are still small relative to the size of bank balance sheets. They are also a fraction of the US$3trn in US private credit and CLOs.
The OFR data suggest four reasons why contagion from private credit into banks is likely to be limited.
Firstly, unlike multi-strategy hedge funds, private credit fund leverage is limited. According to the OFR, “the median leverage ratio (gross assets divided by net assets) across our sample is approximately 1.0, which effectively indicates no leverage”. The OFR numbers imply that at least half of funds use little or no leverage, even if the bigger funds tend to run more leverage.
Secondly, private credit and BDC lending are senior in the capital structure. The OFR said its “sample reveals that the vast majority (86%) of these loans are secured by first or second liens, providing banks with collateral protection in the event of default”.
Thirdly, just over half of these loans are syndicated, which should mean that no bank is overexposed to a particular credit.
Fourthly, although private credit has its roots in highly leveraged buyout deals, banks are generally conservative in their underwriting approach and mostly avoid deals with PIKs. The OFR said only 21% of the loans meet the regulatory classification criteria for “leveraged loans”.
It is also worth noting that the recent high-profile failures associated with private credit are actually a bit more complicated. Creditors to First Brands and Tricolor were bank-owned asset managers and hedge funds more than top private credit specialists. The latest example of alleged double-counting of collateral in asset-backed lending – the UK mortgage lender MFS – caused losses to banks, not private credit.
In fact, the bigger risk to banks may not be in lending but in reputational risk – especially if their wealth managers have been aggressively pushing these funds to the bank’s high-net-worth clients.
Secondary trading
Even as they reduce leverage, increase collateral haircuts and focus on verifications, banks may find new ways to make money out of private credit. Apollo has long talked about its ambitions for more secondary trading given its focus on investment-grade private credit. It recently announced a partnership with fixed income data and exchange giant Intercontinental Exchange to provide daily independent marks for private credit. Not all parts of the industry will want the same, but for those wanting more transparency and “bond market” features, working with investment banks will be crucial.
In fact, Rehan Latif, global head of credit trading at Morgan Stanley, told Bloomberg earlier this year that providing such trading services to private credit players is “the biggest single opportunity coming into 2026”.
Private credit’s struggles also mean that the balance of power has shifted. The nonbanks have shown that private credit-style lending is a place where good money can be made, at least if lending is done properly. The banks now have a chance to use their balance sheets or third-party capital within their asset management businesses to make private credit-style loans – something that may be even easier now US regulators have loosened capital requirements in a way that will benefit lending activities over trading. If anyone had doubts about this, Bank of America recently became the latest bank to announce plans to invest in private credit – in its case, US$25bn.
Rupak Ghose is a corporate adviser and former financials research analyst. Read his Substack blog here.