US Banks' Private Credit Exposure Nears $300B, Moody's Warns of Asset Risks

Moody's reports that U.S. banks have significantly increased their exposure to private credit providers, with loans reaching nearly $300 billion, a substantial rise that now constitutes over 10% of total bank loans. This surge in lending to non-depository financial institutions (NDFIs) has outpaced all other bank lending activities since 2016, raising concerns over potential risks related to underwriting standards and asset quality, especially amid recent bankruptcies like those of Tricolor and First Brands. While private credit offers diversification benefits by lending to providers rather than directly to middle-market borrowers, Moody's warns of increased leverage at the portfolio company level and lower transparency, necessitating vigilant credit risk management. Fitch highlights that insurers affiliated with alternative managers are also increasing exposure to illiquid, hard-to-value assets, which elevates valuation and liquidity risks, though these are somewhat mitigated by strong asset-liability management and diversification. Deutsche Bank underlines the software industry's vulnerability within private credit lending, noting that a significant portion of private sector funds is tied to software companies, which face disruption risks from artificial intelligence. Overall, while the rapid growth in private credit entails "bubble-like" characteristics and heightened risks, experts currently consider these exposures manageable and not systemic for the broader financial system, albeit requiring careful oversight.