The Financial Stability Board (FSB) has raised concerns about the private credit sector’s heavy involvement in the artificial intelligence (AI) boom, suggesting that this could result in significant financial losses if market corrections occur. In its latest report, the FSB highlights how industries such as healthcare, services, and technology have increasingly relied on private credit, with AI companies becoming prominent borrowers. These companies have been securing funds from private lenders to develop datacentres and other essential infrastructure, with AI-related deals comprising over one-third of private credit transactions in 2025, a sharp rise from 17% in the previous five years.
The report cautions that the concentration of lending in specific sectors like AI may expose private credit funds to unique risks and make them vulnerable to disruptions that affect specific regions or industries. A notable point of concern is the escalation in AI asset valuations, which could plummet, triggering substantial credit losses for investors in the private credit market. The FSB notes that a shortage in electricity supply, crucial for building and running datacentres, could lead to project delays or cancellations, further exacerbating financial risks.
Additionally, the FSB warns of potential overinvestment in datacentres, which might surpass the actual demand for AI technologies, resulting in diminished returns on investment. Such scenarios add to the unease surrounding the practice of private credit firms arranging potentially risky loans. Unlike traditional banks, these firms lend using investor capital rather than customer deposits, operating outside the conventional regulatory banking framework. Recent uncertainties have prompted massive withdrawals from certain private credit funds, forcing some to limit how much investors can reclaim.
Proponents argue that private credit lenders possess the expertise to assess risks more effectively and offer tailored loan solutions. However, the FSB report points out that borrowers from private credit funds often have lower credit ratings and higher debt levels compared to those borrowing from traditional banks. This dynamic poses additional risks as traditional banks are also becoming increasingly intertwined with the private credit market. They are doing so by lending directly to private credit funds, financing riskier fund portfolios, or extending loans to companies that also secure funding from private credit sources.
Moreover, an increasing number of banks are forming alliances with asset managers to engage in private credit transactions. These collaborations highlight the growing entanglement between traditional banking institutions and the expanding private credit sector, implying potential systemic risks that could affect broader financial stability.