Banks are pretending not to notice a big problem with private credit

• Key insight: The real risk is not whether private credit looks like 2007 — it’s whether banks understand how much of their balance sheets are quietly exposed to marks they don’t control.
• Supporting data: U.S. banks have extended nearly $300 billion in credit to private credit funds, business development companies and collateralized loan obligations, per Moody’s data as of October 2025.
• Forward look: A step in the right direction is to implement continuous (not quarterly) mark discipline, forward‑looking (not retroactive) risk reporting and independent valuation governance.

The question about private credit that many people are asking right now is whether this is 2007 again. That’s the wrong framing. The real question is what happens when the funds that banks have quietly financed for years face stress — and when the collateral banks think they’re holding is worth less than quarterly net asset value statements imply.

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Let’s be direct: U.S. banks have extended nearly $300 billion in credit to private credit funds, business development companies, or BDCs, and collateralized loan obligations, or CLOs, per Moody’s data as of October 2025. Wells Fargo alone sits at $59.7 billion — nearly double the next‑largest lender. Nondepository financial institution loans are now 10.4% of total U.S. bank lending, up from 3.6% a decade ago.

This is less diversification than a structural bet on an asset class whose marks are set quarterly by managers with an incentive to defend them.

Some call it “back leverage” — stress that can run in reverse, from private credit into bank balance sheets. That stress is already visible.

Blue Owl capped redemption requests at 5% in two private credit funds after elevated requests. Blackstone Credit reported a 7.9% surge in redemption requests. JPMorgan absorbed $170 million in Tricolor losses. UBS disclosed over $500 million in First Brands exposure. Jefferies revealed $715 million in what are being called “questionable receivables.” Individually, these are not systemic numbers. Together, they are a pattern.

Structurally, this is not a repeat of 2007. The leverage multipliers are different, there’s no AAA‑rated CDO tranche masking junk risk and bank capital ratios are three to four times stronger than precrisis levels.

The credit default swap, or CDS, market isn’t ringing the alarm — an important distinction from 2007 because CDS is a real‑time signal that can’t be smoothed like quarterly NAV marks.

JPMorgan‘s five‑year CDS is in the low‑50s bps (vs. ~160 bps at the 2009 peak). Goldman Sachs and Citi sit in the high‑60s to low‑70s bps range, with Morgan Stanley modestly higher. Elevated versus 2024, yes — but consistent with cycle widening, not systemic distress.

Still, the comparison to 2007 starts to rhyme.

In 2006–2007, it wasn’t just mortgage losses — it was opaque balance‑sheet exposure and uncertainty about valuation that turned risk into panic.

Today, many private credit NAVs are set quarterly, by managers with a financial stake in the marks, on Level 3 assets with no observable market prices. Slow marks, confident lenders and suddenly uncertain investors combine into a familiar mix.

The risk is not that major banks fail tomorrow. It’s that banks tighten warehouse lines and NAV facilities at the same time that private credit funds face redemption pressure. This is what turns a confidence problem into a liquidity squeeze via coordinated funding withdrawal.

It doesn’t require a derivatives web or a housing collapse to hurt. It is specific — and manageable — if banks choose to act.

Banks that have lent roughly $300 billion to this sector on the assumption that NAV marks are reliable should demand better information than they are currently receiving.

A step in the right direction is to implement continuous (not quarterly) mark discipline, forward‑looking (not retroactive) risk reporting and independent valuation governance.

For instance, marks should be recalibrated more frequently than quarterly. If a fund can’t show discount‑rate alignment with public‑market signals — leveraged loan spreads, CLO pricing and high‑yield option‑adjusted spreads — then it is giving lenders a snapshot of a world that may no longer exist.

Quarterly marks anchored to stale assumptions are deferred uncertainty. Banks should require periodic benchmark evidence that discount rates respond to market conditions, rather than being managed to preserve distributions.

Also, the metrics that matter most — refinancing needs over the next 12 to 24 months, payment‑in‑kind, or PIK, concentration, and borrower‑level EBITDA deterioration versus underwriting — are often not provided in a standardized way or consistently required by lenders. Banks should make refinancing dashboards and PIK disclosures conditions of facility renewal, not optional “enhancements.”

Finally, manager‑set Level 3 marks create an unavoidable conflict: Originators value what they hold while charging fees on NAV. That perception of bias is no longer tolerable for lenders that finance the structure.

Independent oversight of Level 3 marks — including transparent discount‑rate methodologies by industry bucket — protects lenders as much as investors. Banks should price the difference between strong and weak valuation governance — and insist on the standard that earns the lower spread.

CDS spreads won’t be a leading indicator of valuation integrity. By the time they flash red, collateral damage is already done.

The time to demand better marks, stronger monitoring and independent governance is before redemption gates force the issue — not after.

In 2007, the refrain was: Look at the underlying assets. Today the underlying assets may not be in systemic distress, but the marks are not fully trustworthy — and banks are operating on a degree of informational faith that would be unacceptable in most other credit contexts.

That faith is not a lending standard. It’s how $300 billion of

exposure quietly accumulates — until the next funding cycle forces a reckoning.