Over the past few weeks, headlines have focused on emerging signs of stress in the $2 trillion private credit market, particularly among nontraded business development companies. These funds, which lend to small and medium-sized US businesses, now hold roughly $270 billion in assets.
But fears of a looming private credit crisis are overblown. The health of any credit market — private or public — ultimately hinges on the same four factors that have driven every credit cycle in history.
The first factor, particularly affecting the insurance industry and the banking system, is underwriting quality and the channels through which credit losses are transmitted. Here, there is reason for concern, as private credit deals often feature weaker covenants and more permissive structures than conventional bank loans.
Even so, while the full extent of the insurance industry’s exposure is difficult to gauge, existing capital reserves should help absorb losses from underperforming loans. The Federal Deposit Insurance Corp.’s Deposit Insurance Fund totaled $154 billion at the end of 2025, about three times its pre-2008 level. The National Association of Insurance Commissioners has also indicated that insurance company portfolios are well protected against the additional risks associated with private credit.
Moreover, risks to the banking system appear limited. The overall scale of private credit remains relatively small, especially compared with the mortgage market before the 2008 financial crisis. At roughly $2 trillion, the direct lending market accounts for about 3 percent of total US household and business debt. Mortgages, by contrast, made up roughly 60 percent of total household and corporate debt in 2006, at the peak of the housing bubble.
Banks are also largely insulated from first-loss risk, which is typically borne by private credit investors. And unlike in 2008, private credit defaults are more likely to unfold gradually rather than all at once. This suggests that the 5 percent redemption gates common in private credit funds may be more stabilizing than many assume. While controversial, these limits slow withdrawals and ease immediate liquidity pressures.
The second key determinant of credit market health is who ultimately bears the risk. Problems tend to arise when the “wrong” investors — particularly relatively unsophisticated retail investors pursuing higher returns while holding inherently illiquid assets, as well as institutions engaged in regulatory arbitrage — are the ones exposed. For example, some insurers use private credit structures to obtain favorable regulatory treatment, enabling them to hold less capital against their investments. As a result, their positions can appear less risky than they really are.
The third factor is leverage. Excessive leverage has been a major driver of past credit crises, with losses spreading through the banking system into the real economy. But the shift in credit creation away from banks to nonbanking financial institutions has reduced leverage within the traditional banking system, making the risks less severe than in previous cycles.
But that shift comes with its own set of concerns.
According to JPMorgan Chase CEO Jamie Dimon’s annual letter to shareholders, nonbanking institutions account for 64 percent of leveraged lending, up from 54 percent in 2010. Strikingly, nonbanks’ share of mortgage origination rose from 9 percent to 77 percent over the same period. Consequently, a growing portion of credit risk now sits outside the traditional banking system and, to some extent, beyond regulators’ reach.
In practice, leverage enters the financial system in two main ways: through debt taken on by borrowers and through borrowing by investors and credit funds themselves. On the borrower side, debt levels appear relatively stable, with leverage rising only modestly from 4.8 times earnings in 2024 to just over five times earnings in 2025.
Pricing is far less transparent, but there is a growing sense that some loans have been priced too aggressively, allowing companies to take on more debt than fundamentals justify. Higher leverage, in turn, erodes the equity cushion and lowers recovery rates as conditions deteriorate.
At the fund level, creditors often borrow and then lend to businesses. While this can boost returns in good times, it can also exacerbate losses in downturns. Those losses can then spread through the financial system and into the broader economy. But credit controls and higher capital requirements, such as those imposed on global systemically important financial institutions following the 2008 crisis, help reduce the risk that defaults spill over into the real economy.
The fourth factor for credit markets is the quality of the assets being financed. The key question is whether those assets generate consistent cash flows or whether debt is tied to speculative or unproductive investments like cryptocurrencies, art and undeveloped land, which can leave the broader economy vulnerable to a credit shock.
More recently, attention has turned to asset-light businesses, which offer limited collateral in the event of distress. According to JPMorgan, private credit portfolios have roughly 40 percent exposure to the tech and business services sectors — higher than any other segment of the market.
Investors are right to be concerned about that figure. Even so, from a broader perspective, the risk it poses is less systemically threatening than the subprime mortgage boom that fueled the pre-2008 housing bubble.
Taken together, these developments point to a market that warrants scrutiny, but is not approaching crisis conditions. For now, predictions of a private credit meltdown appear to be running ahead of the facts.
Dambisa Moyo
Dambisa Moyo is an international economist. The views expressed here are the writer’s own. — Ed.
(Project Syndicate)
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