A new report out from the Federal Reserve on Friday says risks to the financial system from private credit “appear limited and manageable.”
However, the central bank warned that “redemptions and negative sentiment could lead to a reduction in credit availability for some borrowers, especially those with relatively higher credit risk, who could find other sources of credit costly or difficult to access.”
Concern has rippled through private credit markets in recent months as more investors moved to withdraw their money after a merger by private credit lender Blue Owl Capital (OWL) was called off. The event triggered a cascade of redemption requests.
Increased redemptions then spread as fears grew that AI could render traditional software business models obsolete, potentially leading to a surge in defaults among companies that once seemed safe. Many private credit lenders hold bonds of software companies.
The report noted that some open-end bond and loan mutual funds remained exposed to “liquidity transformation risks that could cause asset fire sales in market downturns, as they allow daily redemptions while holding assets that might become illiquid in times of stress.”
But overall, the Fed said loan defaults in private credit markets remained at relatively low levels; though the elevated usage of payment-in-kind provisions — through other forms of compensation like interest, dividends ,or wages — indicates some borrowers may face repayment difficulties.
Life insurers have also steadily increased their investments in risky and illiquid assets over the past decade, and their activity has contributed to the expansion of private credit, according to the Fed.
Based on data through the fourth quarter of 2025, banks continued lending to private credit funds, with loan commitments and outstanding amounts increasing from the previous quarter. There were some reductions in loans to certain private credit funds, while loans to other private credit funds increased. The Fed saw the adjustments as consistent with historical patterns and as reflecting normal risk-management practices at banks.
Federal Reserve Chair Jerome Powell said at the end of March that he did not see a risk of contagion in private credit markets that could spread to the wider financial system, though the central bank is watching the situation closely.
The findings are part of a larger semiannual report the Fed releases on financial stability risks since the 2008 financial crisis, focused on four buckets: asset valuations, borrowing by consumers and businesses, borrowing in the financial sector, and funding risks.
