Wall Street executives said they were stress testing or monitoring private credit portfolios as the asset class came under scrutiny.
But they said they were comfortable with their risk appetite.
The comments come after three of the six largest U.S. Lenders disclosed $108 billion in funding exposure to private or related loans during their quarterly earnings. After fears of AI risks, fund outflows, and credit stress impacted the shares of alternative asset managers, private debt has gained significant media attention.
The $3.5 trillion asset class has attracted pension funds, insurers and wealthy individuals with the promise of stable, high yields, but its rapid expansion into less liquid, harder-to-value loans has also raised concerns about how they will hold up under stress.
The $1.8 trillion direct lending segment, which is part of private lending, competes directly against widely syndicated loans and traditional bank lending to finance medium-sized and larger private equity-backed deals.
“We’re passing our tests, and we’re comfortable with the way we’re sitting there, so continued monitoring of the risk capital framework will play a role,” Citigroup CFO Gonzalo Luchetti said on an earnings call. He said the bank is continuously examining its portfolio, including the private credit sector, against various macroeconomic environments.
Several negative headlines have plagued the private lending sector this year, raising concerns that software portfolios are vulnerable to AI disruption and that loans to small, middle-market companies could come under pressure.
The default rate among U.S. Corporate borrowers of private credit are expected to rise to a record 9.2% in 2025, according to a report from credit ratings agency Fitch Ratings last month.
Other symptoms of stress have also emerged. Private credit funds, known as business development companies (BDCs), are facing higher rates on their bank borrowings, even as the historically high double-digit returns they earn on private loans are declining.
JPMorgan Chief Financial Officer Jeremy Barnum told reporters that the bank is “looking very closely at this area”, adding that JPMorgan is well protected because of its portfolio diversification, underwriting and client selection.
“But obviously, if you see a big credit cycle with a significant increase in default rates, you will see some losses throughout the system,” Barnum said.
JPMorgan said it had exposure to $50 billion in private debt in the first quarter.
Citigroup said in its presentation that its exposure to non-bank financial institutions in the fourth quarter was $118 billion, of which $22 billion was considered private loans. The bank said private credit exposure was limited to ‘Tier-1’ asset managers and the bank had incurred zero losses over the life of the portfolio. Of the total $118 billion in loans, 76% were securitizations.
Wells Fargo disclosed Tuesday that corporate debt finance – primarily private loans – delivered $36.2 billion of loans, dominated by business services loans at 19%, software at 17% and health care at 15%.
not systemic
Personal lending has grown at breakneck speed over the past decade, expanding into a nearly multi-trillion dollar market as banks pulled back from risky lending following the global financial crisis and tighter regulations.
JPMorgan, the largest U.S. bank by assets, reduced the value of collateral behind some loans to private credit funds after reviewing the impact of market turmoil on software companies, two sources told Reuters last month.
Still, when asked on an analyst call whether the risks in private debt were systemic, JPMorgan Chase CEO Jamie Dimon, widely seen as one of Wall Street’s most influential voices, said, “I don’t think it’s systemic.”
“I know the media headlines have created a tremendous amount of negative sentiment around private debt,” Goldman Sachs CEO David Solomon said in a post-earnings call with analysts.
“Looking ahead, our predominantly institutional drawdown structures, as well as the breadth of our origination funnel, provide us the flexibility to continue to patiently and selectively invest capital.”
Banks also expressed comfort regarding the asset class. Wells Fargo Chief Financial Officer Mike Santomassimo said the bank was comfortable with the risks in its private credit portfolio.
BlackRock CEO Larry Fink said Tuesday that demand for private credit products is “structural,” reflecting banks’ withdrawal from some markets following the 2008 financial crisis and rising global indebtedness. “That’s not changing,” Fink said.
While retail investors have pulled out of some private credit funds, institutional demand is “accelerating,” Fink said, as high returns and low leverage have made such offerings a staple of portfolio construction. The wide spread in the market points to a shift in short-term sentiment that could create challenges for some providers, a situation that favors BlackRock competitively, he said.
Elsewhere, insurer MetLife CEO Michel Khalaf said at the Semaphore World Economy Summit in Washington on Monday that there may be some cracks in the private credit sector but that is not a sign it is a bubble that is about to burst.
(Reporting by Manya Saini, Arasu Kannagi Basil, Pritam Biswas and Prakhar Srivastava in Bengaluru and Saeed Azhar, Tatiana Botzer, Colin Barr in New York, Nivedita Balu in Toronto; Editing by Megan Davis and Nick Zieminski)
