Why Greater Regulatory Scrutiny of Private Credit Isn't Necessarily Negative

Private credit has reached a point where regulators no longer view it as operating at the margins of finance. The Financial Stability Board’s (FSB’s) latest assessment reflects that shift, marking an important evolution in the regulatory debate. Private credit is no longer viewed merely as an alternative asset class, but as part of the infrastructure of modern finance and the global financial system.

That shift reflects the sector’s rapid growth and deeper integration with banks, insurers, pension funds, and capital markets. Over the past decade, it has become a significant source of corporate and infrastructure financing, filling gaps left by retrenching banks, while offering investors yield and borrowers greater flexibility and certainty of execution.

This is not inherently problematic. In many respects, it is a predictable consequence of post-Global Financial Crisis (GFC) reforms that strengthened bank resilience while encouraging financing activity to move toward channels better suited to certain parts of the economy. Private credit has expanded access to capital, diversified financial intermediation, and increased financing flexibility. But scale and interconnectedness inevitably attract greater regulatory attention.

Even so, perspective matters. Global private credit assets are estimated at roughly US$1.5–2 trillion — well below 1% of global banking assets and only a small share of overall global financial assets — while direct bank exposures remain limited relative to total bank balance sheets.

The FSB does not conclude that private credit is inherently unstable. Indeed, it recognises benefits including diversification, financing flexibility, and alternative channels of credit provision. But the report signals that private credit is now systemically relevant enough to warrant closer monitoring, greater transparency, and a better understanding of how stress could transmit across the financial system under more severe market conditions.

The question is no longer whether private credit matters, but how its continued expansion should be integrated into the broader financial architecture.

Why Regulators Are Focusing on Private Credit Now?

The FSB suggests the growing focus on private credit is being driven less by concerns around immediate losses and more by broader macroprudential questions: how leverage, liquidity, opacity, and interconnectedness could behave under stress as the sector becomes more systemically important.

Higher interest rates are testing assumptions built during a prolonged period of cheap capital, bringing greater scrutiny to debt sustainability, refinancing risk, and liquidity resilience across private markets.

At the same time, private credit is becoming more deeply embedded in strategically important sectors of the economy, including infrastructure, technology, and AI-related assets. As exposures become larger and more concentrated, regulators are focused on how cyclical corrections or funding stress could transmit across markets and institutions.

Retail participation is also changing the regulatory equation. As private credit expands into wealth-management and semi-liquid structures, regulators are paying closer attention to valuation, redemption terms, disclosures, and investor expectations from both conduct and financial stability perspectives.

Importantly, recent redemption concerns have largely centred on retail-oriented evergreen and non-traded structures rather than the institutional private credit market more broadly. Much of the institutional market continues to operate through longer-duration closed-end structures with limited redemption features.

The FSB’s concerns also remain targeted. The focus is less on private credit as an asset class in itself and more on pockets where leverage, liquidity mismatch, valuation uncertainty, or underwriting standards may be more stretched.

Ultimately, this is less about viewing private credit as inherently fragile and more about recognising that it has become an important part of the financial system — and will therefore attract a level of scrutiny more consistent with that role.

Not All Private Credit Is Equal: Structure Matters as Much as Assets

One of the clearest themes emerging from the FSB’s work is that regulators are moving away from treating private credit as a single homogenous asset class. The focus is becoming more granular — centred on fund structures, liquidity features, leverage, and investor composition. In private credit, structure is often as important as underlying asset quality.

Closed-end funds, with locked capital and limited redemption features, generally present more stable liability profiles. Their structures reduce the risk of forced asset sales under stress and better align investment horizons with the underlying assets being financed.

By contrast, semi-liquid or evergreen vehicles introduce different dynamics. Greater liquidity promises and broader investor access can create more complex redemption, valuation, and liquidity-management challenges, particularly during periods of market stress.

As private credit expands beyond large institutional investors into wealth-management and retail channels, regulators are placing greater emphasis not simply on what funds own, but on how they are funded, valued, leveraged, and redeemed.

The key regulatory question is less about asset class labels and more about how different structures behave under stress.

The Shift in Regulatory Lens: From Firm-Level Risk to System-Wide Amplification

Perhaps the most important implication of the FSB’s work is the continued shift in regulatory philosophy—from supervising individual institutions toward understanding system-wide amplification under stress.

Private credit now sits within the broader ecosystem of non-bank financial intermediation (NBFI), where linkages to banks, insurers, pension funds, and capital markets create multiple potential transmission channels.

The central concern is not necessarily that any single institution appears excessively risky in isolation. Rather, regulators are more focused on how interconnected structures, funding dependencies, and correlated behaviour could collectively amplify stress across the financial system.

This is particularly relevant in private markets, where visibility across financing chains can be fragmented and leverage may sit at multiple points within structures rather than on a single balance sheet.

Under stress, correlations, investor behaviour, and funding conditions can become more synchronised than expected, increasing the risk of amplification across interconnected structures.

This shift also helps explain the growing emphasis on system-wide scenario analysis and exploratory stress testing, including exercises undertaken by the Bank of England Financial Policy Committee (FPC).

Regulatory authorities are treating system-wide stress analysis for private markets not as a one-off exercise, but as part of the permanent macroprudential toolkit.

The objective is not to predict collapse. It is to better understand where leverage sits, how liquidity behaves under stress, and across the cycle.

This reflects a broader evolution in financial supervision — from institution-by-institution oversight toward system architecture analysis.

A Global Regulatory Shift

Private credit is following a familiar trajectory previously seen in derivatives, hedge funds, and money market funds — evolving from specialist markets into systemically important parts of the financial architecture.

The FSB’s work reflects a broader international convergence in how regulators are approaching private credit. While supervisory models still differ across jurisdictions, the overall direction is becoming clearer: private credit is being incorporated into mainstream macroprudential and supervisory frameworks rather than treated as a peripheral alternative asset class.

Three broad themes are emerging globally.

First, greater macroprudential focus. Authorities are examining how leverage, liquidity, funding dependencies, and interconnectedness could behave under stress across the non-bank financial system. In the UK, the Bank of England FPC, alongside the Prudential Regulation Authority (PRA), has intensified its focus on NBFI transmission channels, including fund leverage, margining practices, and common exposures.

Second, stronger focus on valuation governance and market integrity. Regulators are placing greater emphasis on valuation independence, pricing methodologies, disclosure standards, and consistency across private markets.

The UK Financial Conduct Authority’s (FCA’s) work on private market valuations reflects concerns that valuation smoothing may obscure the timing and transmission of losses. In parallel, the US Securities and Exchange Commission (SEC) has intensified its focus on disclosure, fee transparency, and valuation practices within private funds.

Third, growing supervisory focus on investor resilience and distribution risks. Authorities are focusing on how private credit products are distributed, who ultimately bears the risk, and how products may behave under stress as retail participation expands.

In Australia, ASIC has focused on retail access, product design, and distribution practices, while APRA is placing greater emphasis on valuation discipline, due diligence, and underlying exposures within superannuation portfolios.

At the same time, MAS in Singapore is increasingly incorporating private markets into forward-looking resilience and supervisory frameworks.

Taken together, these developments point to a broader shift in regulatory thinking.

Private credit is being drawn into the same supervisory and macroprudential conversation that has historically focused on banks, insurers, money market funds, and other systemically important financing channels.

As the sector becomes more embedded within the architecture of the financial system, regulators are applying familiar regulatory lenses: transparency, resilience, governance, liquidity management, and the potential for amplification under stress.

Regulation Can Legitimise as Much as Restrain

The FSB’s work should not be interpreted solely through the lens of restriction. Handled well, greater oversight could strengthen private credit’s long-term institutional role within the financial system.

Better transparency and stronger governance can support market confidence, attract more stable long-duration capital, and help differentiate higher-quality managers. Improved disclosure may also reduce political and public scepticism as private credit becomes more visible and systemically important. 

Well-calibrated oversight is therefore not necessarily a constraint. In many respects, it can strengthen the industry’s long-term resilience and reduce the risk of more blunt or reactive policy intervention later.

The challenge is calibration.

Private credit funds differ fundamentally from banks. Banks create money, take deposits, and operate payment systems, making prudential capital requirements central to financial stability regulation. Private credit funds primarily intermediate investor capital and generally operate through different funding and liquidity structures.

It is therefore unsurprising that regulators have not attempted simply to impose traditional bank-style capital frameworks directly onto private credit.

The objective is not to regulate private credit as if it were banking. It is to ensure that, as the sector grows in scale and interconnectedness, risks around leverage, liquidity, valuation, and opacity remain manageable and transparent under stress.

Handled well, regulation may ultimately institutionalise private credit rather than constrain it.

Conclusion

The FSB’s latest work confirms that private credit is no longer viewed simply as an alternative investment strategy operating at the margins of finance. It is now being treated as part of the architecture of the global financial system itself.

The debate is therefore no longer whether private credit belongs within the financial system. The challenge now is ensuring that, as the sector grows in scale and interconnectedness, regulation evolves in ways that strengthen resilience, improve transparency, and support market confidence without undermining one of the fastest-growing sources of financing in the global economy.

Private credit’s regulatory moment has arrived. The question now is not whether scrutiny will increase, but how regulators and industry together shape the next phase of the market’s institutional evolution.

Flint can help navigate the changing regulatory environment 

As private credit becomes more embedded within the financial system, firms will need to deal with a more complex and evolving regulatory landscape. Flint helps firms anticipate and navigate these developments — from evolving supervisory expectations around valuation, liquidity, and disclosure through to broader policy and regulatory engagement across private markets.