Is there another US credit bubble on the way?
- Matthew Parish
- 6 minutes ago
- 5 min read
Widely respected Bank of England Governor Andrew Bailey told members of the House of Lords, the United Kingdom's upper legislative Chamber, on 21 October 2025 that “alarm bells” are ringing in private credit, pointing to the sudden collapses of First Brands and Tricolor—US borrowers financed through complex, asset-backed structures and tranche-like “slicing and dicing”—as "potential canaries in the coal mine". He drew explicit parallels with pre-2008 engineering, where leverage, weak underwriting and opacity masked correlated risks until they crystallised. The Bank of England he assured Parliament, will respond with a system-wide exploratory scenario exercise spanning banks, insurers, pension funds and private lenders to map the interconnections. Yet the problem is global, and the United Kingdom alone cannot challenge a US financial problem.
What is private credit and why it matters now
Private credit—direct, non-public loans to companies, often sponsor-backed—has grown from a niche product two decades ago into a market measured in the low trillions of dollars globally, competing with leveraged loans and high-yield bonds. In the United States alone, central-bank and academic work places the stock around the $1 trillion mark by 2023, with rapid acceleration since 2019 as tighter bank rules, volatile public markets and abundant private capital redirected credit intermediation into less transparent channels. Funds often promise relatively high, floating returns; they rely upon warehouse credit lines (i.e. secured by warehouse contents) from banks, and subscription and NAV (net asset value) facilities (different sorts of lending into investment funds, which themselves ought to be investing, not receiving lending to pass on) and credit ratings that may be private or lightly contested (i.e. not properly scrutinised). These features are not inherently unsafe, but they embed leverage and liquidity features that are difficult to observe in real time.
Channels of contagion to the banking system
The crucial question is not whether private-credit funds can lose money—they can—but whether losses transmit back into the regulated core. There are at least five conduits:
Bank credit to the private-credit complex. US banks provide committed revolving and term facilities to private-credit vehicles and business development companies; facilities can be drawn precisely when market stress rises, pulling liquidity out of banks and crystallising counterparty risk.
Insurer and pension exposures. Life insurers in North America and the United Kingdom have been significant buyers and co-lenders; market-wide markdowns would erode regulatory capital and could force deleveraging or reallocation.
Ratings and risk migration. If private ratings and tranche structures prove over-optimistic, downgrades can propagate through solvency metrics, collateral haircuts and investor mandates in a pro-cyclical loop reminiscent of structured-credit downgrades in 2007–08.
Bank market risk and funding. Banks may warehouse loans for distribution, provide hedges and trade related paper; spread gaps, and forced sales feed back, into trading books and funding costs.
Macrofinancial spillovers. Borrowers in private credit are disproportionately sponsor-backed, leveraged mid-market firms; a rise in policy rates or a profits shock can lift default rates across a correlated cohort, pressuring employment, capital expenditure and tax receipts.
How 2025 differs from 2008
The banking core is better capitalised and more liquid than in 2008; there is central-clearing for many derivatives, tougher stress testing, and living wills (regulatory documents for orderly liquidation in case of failure). These reforms reduce the probability of the kind of sudden, system-wide paralysis that followed the failure of Lehman Brothers. Moreover private-credit funds generally promise less frequent liquidity than open-ended bond funds, which can dampen immediate run dynamics. That said, the scale and connectedness of non-banks to banks have grown markedly. The IMF’s October 2025 Global Financial Stability Report highlights roughly $4.5 trillion of US and European bank exposures to hedge funds, private-credit groups and other non-banks—about 9 per cent of loan books on average—large enough to transmit stress from the shadows back into regulated institutions if shocks are sufficiently adverse.
Are current tremors isolated or systemic?
Bailey cited First Brands and Tricolor as early signals rather than root causes. The pattern is concerning precisely because it echoes 2006–07: high leverage for borrowers; creative tranche structures that disperse risk but also obscure it; optimistic ratings on instruments that later prove brittle; and heavy reliance on wholesale and bank contingent lines of credit that can tighten suddenly. Whether this metastasises depends on three variables in 2025–26:
• The macro path. A growth slowdown with sticky inflation raises floating coupons and refinancing costs just as revenues weaken, a toxic combination for leveraged borrowers.
• Concentration and co-movements. If exposures are crowded in similar sectors, sponsors and lenders, correlations will jump when defaults rise.
• The banking nexus. If a subset of banks has outsized lines to private-credit vehicles relative to capital, losses and liquidity demands will cluster—exactly the scenario the Bank of England’s exploratory exercise aims to measure.
How plausible is a 2008-style global banking crisis?
On balance a straight replay of 2008 remains less likely, because the banking system’s buffers and resolution toolkit are stronger and the locus of risk sits outside deposit-funded balance sheets. But a serious, synchronised shock in private credit could still produce a damaging banking episode via the channels above—especially if losses arrive alongside sovereign-bond volatility, commercial real-estate stress, or a funding squeeze. In its latest analysis the IMF emphasises elevated stability risks tied to non-banks and warns that stress could pull banks below minimum capital in adverse scenarios—precisely the kind of amplification Bailey is worried about.
Policy implications
The Governor’s prescription—shine a light before you reach for heavy regulation—is sensible. A credible near-term package would include: system-wide scenario tests that explicitly model drawdowns on bank lines; NAV-loan dynamics and insurer solvency; mandatory data collection on private ratings, tranche waterfalls and covenant packages; disclosure and supervisory limits on concentrated bank exposures to private-credit funds and their warehousing chains; and coordination with US authorities, given the market’s centre of gravity. If those steps reveal pockets of fragility, targeted capital surcharges or large-exposure constraints for the most interconnected banks would be justified; blanket regulation of all private credit would not.
Investor and lender hygiene
Asset owners should scrutinise fund-level leverage, the prevalence of payment-in-kind and covenant-lite terms, the scale and triggers on subscription/NAV lines, and ratings governance. Banks should assume committed facilities will be drawn at the worst moment; price them accordingly, hedge counterparty risk, and avoid concentration. Insurers and pensions need to test fair-value haircuts and reinvestment constraints under spread shocks that look more like 2022’s gilt episode than a neat textbook scenario.
Judgment
Bailey is right to say the echoes of 2008 are “worrying”. The system is stronger where it matters most, but the perimeter has shifted. A US-centred private-credit bust would not need to fell a major bank to cause a global banking scare; it would only need to force a handful of institutions, with large non-bank lines or insurer exposures, into deleveraging at the wrong moment. The Bank of England’s system-wide exercise is therefore the prudent next step—and the minimum needed—to determine whether these are isolated failures or the first cracks in a structure built during a decade of easy money.