MW These investments promise high yield with bond-like safety. But what looks too good to be true often is.
By Patrick T. Harker
When dentists start getting cold calls about private credit, you know the fad has peaked
Here's the lesson from 40 years of watching markets: When something becomes a fad, it's time to get out.
For most of my decade as president of the Federal Reserve Bank of Philadelphia, I sat around the FOMC table every other quarter for our financial-stability briefing. Private credit came up almost every time. The staff would walk us through the data. The market was growing fast, leverage was opaque and connections back to the regulated banks were harder to see.
The conclusion was always more or less the same. The staff wasn't prepared to call it systemic, so we would continue to monitor it. The next quarter, we'd do it all again.
The frustrating part wasn't that we couldn't see the problem coming. We could see it. The frustrating part was that the tool kit the Fed had to address it was quite limited.
I've been out of that job for almost a year, and the conversation has finally changed. In late February, Blue Owl Capital $(OWL)$ told its investors it would end quarterly redemptions from its $1.6 billion OBDC II fund. A few weeks earlier, Blackstone (BX) allowed record redemptions totaling nearly 8% of the assets in its flagship credit fund. Both firms are among the largest and most respected in the roughly $2 trillion private credit market. Both took these steps because their retail shareholders, the ones who invested most recently, abruptly wanted out.
A few weeks ago, in Hong Kong, I had dinner with a group of senior financial professionals, several of whom were in private credit. One of them mentioned, almost in passing, that his father, a retired dentist, had recently received an unsolicited mailing inviting him to invest in a private-credit fund. The comment was an aside in a long conversation, but I thought about it the entire flight home.
When the marketing of a complex, illiquid financial product reaches the unsolicited-mail-to-retired-dentists stage, you're looking at a market that has become a fad. And here's the lesson I've taken from 40 years of watching markets, as both an academic and a regulator: When something becomes a fad, it's time to get out.
I want to be careful about what I'm not saying: I am not saying private credit is the next subprime market, which imploded in 2008. The private-credit market is dwarfed by the roughly $13 trillion that investors have committed to investment-grade corporate bonds and residential mortgages. JPMorgan Chase CEO Jamie Dimon laid this out in his most recent shareholder letter and concluded, correctly in my view, that comparing private credit's issues to 2008 is a stretch.
I'm saying something narrower. This isn't really about sophisticated firms being punished by unsophisticated ones, although there's some of that. It's a more general feature of how markets work.
When a once-obscure strategy becomes the thing everyone is doing, the people coming to it last are the least informed about why it ever worked. Consider that the single-largest perpetual private-credit fund has to deploy roughly $43 billion a year just to stay invested - more than a quarter of the entire U.S. annual direct lending market. No underwriting team in the world is selective at that volume. The pattern is older than this market, and we have lived through it before, in the savings-and-loan deregulation of the 1980s and again in the years leading up to 2008.
We don't have to wait for this one to play out fully. Last September, the auto-parts manufacturer First Brands Group and the subprime auto lender Tricolor Holdings collapsed within days of each other, both amid fraud allegations that included the double-pledging of collateral across multiple lenders. The lenders to First Brands believed they were underwriting at roughly five times leverage. The actual figure, once off-balance-sheet financing was accounted for, was closer to 20. Cambridge Associates concluded afterward that the high-quality private-credit managers had spotted the warning signs early and avoided both situations, while banks, broadly syndicated loan funds and rating agencies did not.
The Federal Reserve and the other U.S. banking regulators have every right to ask hard questions about banks' private-credit exposure, and to demand transparent answers.
Private credit kept appearing on our radar at the FOMC quarter after quarter because the direct supervisory authority sat outside the perimeter. In the current political environment, the prospect of extending that perimeter to bring private-credit funds under bank-style supervision is remote.
But this isn't the only lever available to regulators, and not even the most important one. The banks that lend to private credit funds are within the perimeter, and their exposure has grown by an order of magnitude over the past 10 years. Bank lending commitments to private-credit vehicles rose to roughly $95 billion at the end of 2024 from about $8 billion in 2013. Bank commitments to private equity and private-credit fund sponsors represent about 14% of total nonbank financial institution lending, up from around 1% a decade ago.
The Federal Reserve and the other U.S. banking regulators have every right to ask hard questions about banks' private-credit exposure, and to demand transparent answers.
If you can't see what's going on inside an institution your regulated banks are funding, and if there's no transparent price associated with what that institution is doing, you're taking a big risk. That's the situation we find ourselves in.
The banks know it. Regulators should be asking about it. If the banks can't give satisfactory answers, banking supervisors should require them to set capital aside as if the answer were the worst plausible one. That isn't regulatory overreach. It's basic prudential supervision, and it's well within the existing tool kit.
I sat through too many financial stability briefings to think this problem has a clean solution. But the answer to a risk you can't see clearly is not to look away. It is to use the authority you do have to demand that the people you're funding show you what's on their books. Regulators have that authority over the banks. They should use it.
Patrick T. Harker is the Rowan Distinguished Professor of Operations, Information, and Decisions at the Wharton School, University of Pennsylvania, and former president and CEO of the Federal Reserve Bank of Philadelphia (2015-2025). He previously served as dean of the Wharton School and president of the University of Delaware.
More: The private-credit mess won't lead to a financial crisis like 2008's, says top IMF official
Also read: Private credit not only won't spark a financial crisis - it may be more stable than your bank
-Patrick T. Harker
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April 22, 2026 09:46 ET (13:46 GMT)
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