Private credit has grown so large and intertwined with banks and insurers that it now poses a systemic risk in future financial crises, according to a new Moody’s Analytics study co-authored by economists and regulators. 

The report warns that the opaque nature of private credit and its deepening ties to traditional finance could amplify financial shocks due to increased interconnectedness. Since the 2008 crisis, banks have reduced lending amid tighter regulations, creating room for private credit funds—often lending to riskier, heavily indebted companies—to flourish with less oversight. 

Researchers used business development companies as a proxy for the sector and found their market behavior is now more correlated with broader financial stress than in the past. Although private credit firms argue they are less prone to panics due to their long-term investor base, banks are still deeply exposed through indirect relationships like fund financing and risk transfers. 

Finsum: While private markets tend to be insulated from recessions compared to their public counter parts it’s important to keep this risk in mind when investing