In recent years, global finance has become increasingly data-driven. Advanced analytical systems, machine learning models and ever more sophisticated technological infrastructures process vast amounts of financial information in real time. In public markets, in particular, automation is now an integral part of how the system operates: a significant proportion of transactions is executed by algorithms and automated systems, a sign of just how central technology has become to the architecture of modern finance (U.S. Securities and Exchange Commission, 2024).
However, this context of increasing technological sophistication raises a fundamental question. If finance is becoming increasingly data-driven and supported by artificial intelligence, how is it possible that large pockets of risk continue to accumulate within the financial system without being immediately apparent?
Part of the answer can be found in the rapid growth of the private credit market.
The history of financial markets shows that sectors characterised by strong growth, low transparency and limited liquidity tend to accumulate vulnerabilities that only become apparent when economic conditions deteriorate. In recent years, various institutions involved in monitoring financial stability have drawn attention to this very phenomenon in the context of the expansion of non-bank financial intermediation. The European Central Bank has emphasised that the growth of credit extended by non-bank intermediaries can amplify systemic vulnerabilities when transparency and liquidity are limited (European Central Bank, 2025). Similarly, the International Monetary Fund has highlighted that lending activity outside the traditional banking system can generate fragilities that tend to emerge during periods of financial market stress (International Monetary Fund, 2025).
Against this backdrop, private credit has emerged as one of the most significant developments of the past decade. In just a few years, it has evolved from a relatively niche investment strategy into one of the most dynamic segments of global finance. Direct lending funds now finance thousands of mid-market companies that in the past would have relied almost exclusively on bank lending. Estimates suggest that the global value of the private credit market now stands at between $1.7 and $2 trillion, fuelled by a growing allocation of institutional capital seeking higher returns than those available in traditional bond markets (Bloomberg, 2026; Financial Times, 2025).
The expansion of private credit, however, does not mean that the role of banks has disappeared. On the contrary, the system remains closely intertwined with the traditional banking ecosystem. Moody’s estimates that US banks have provided approximately $300 billion in financing to private credit managers, highlighting how closely the non-bank credit sector remains linked to the dynamics of the banking system (Moody’s, 2025).
One of the key mechanisms underpinning this interconnection is what is known as ‘back leverage’. Under this model, private credit funds borrow from banks to increase the leverage of the loan portfolios they manage. A portfolio that might generate returns of 8–9 per cent can achieve double-digit returns precisely because of this leverage effect. The strategy proved particularly effective during the long period of low interest rates that characterised the previous decade, but it also introduces a structural dependence on bank financing.
If banks were to reduce lending to these funds – due to regulatory pressure, a deterioration in macroeconomic conditions or an increase in credit risk – the leverage that underpins many business models in private credit could decline rapidly. In such a scenario, returns could become less competitive, increasing the likelihood that investors will demand the repayment of their capital.
Regulators have already begun to monitor these developments closely. The Office of Financial Research estimates that private credit funds may have accumulated around $345 billion in debt, whilst noting that the actual level of leverage could be higher due to the opacity of many of the financing structures used in the sector (Office of Financial Research, 2025).
At the same time, there are signs of strain emerging within the private credit ecosystem. Some reports suggest that the industry, now approaching $2 trillion, is facing growing pressure on repayments and difficulties among certain borrowers. In certain situations, some funds have temporarily restricted redemptions to preserve portfolio liquidity in the face of high redemption requests (Reuters, 2026). Journalistic analyses have also highlighted how complex it is to monitor risks in markets characterised by a lack of transparency and highly bespoke financing structures (CNBC, 2025; The Economist, 2025).
In this context, a further driver of transformation is the growing adoption of artificial intelligence in financial analysis and credit management processes. Technological innovation is, in fact, changing the way in which private credit transactions are originated, analysed and monitored. Industry studies indicate that advanced data analytics tools and AI-based systems are progressively transforming various operational processes within the industry (Global Legal Insights, 2026).
According to some surveys, the adoption of artificial intelligence is already widespread in operational activities. A study cited by Private Equity Wire indicates that around 85 per cent of industry executives use AI systems in areas such as document processing, data extraction and portfolio monitoring (Private Equity Wire, 2025). Similarly, Private Debt Investor has highlighted how artificial intelligence can accelerate underwriting processes by extracting structured financial information from complex documents (Private Debt Investor, 2025).
Despite this widespread adoption, artificial intelligence does not yet play a leading role in private credit investment strategies. Decisions continue to be based largely on human judgement, qualitative assessments of management teams, and the interpretation of information that is often incomplete or opaque. Many private credit transactions involve highly bespoke loan structures, negotiations based on direct relationships and risk profiles that are difficult to standardise – conditions that remain complex for current AI systems to assess.
This situation highlights a structural divide within the contemporary financial sector. In liquid, standardised public markets, algorithms now dominate a significant proportion of trading and price formation. In private credit markets, by contrast, decisions remain largely guided by human experience and judgement, whilst artificial intelligence primarily serves an analytical support function.
When these factors are considered as a whole, a potential systemic mechanism emerges. The expansion of private credit increases leverage among borrowers and strengthens the links between banks and non-bank intermediaries. Rising interest rates increase pressure on corporate refinancing. Stress on borrowers can lead to a rise in defaults, which in turn can trigger redemption requests from investors in private credit funds. As these funds hold illiquid loans, redemption pressure can quickly turn into liquidity constraints that spread throughout the entire credit ecosystem.
This trend has already begun to attract the attention of analysts. Indeed, some research suggests that tensions in the private credit market could spread to other credit segments, such as the leveraged loans market, when lending conditions become more restrictive (Agostini, 2026).
None of these signs necessarily implies that a systemic crisis is imminent. However, they do suggest that the private credit market may be entering an early warning phase, in which vulnerabilities accumulated during a prolonged period of expansion are beginning to interact with tighter financial conditions.
For regulators, investors and financial institutions, the main challenge therefore comes down to a question of transparency. The financial sector has never been so rich in data and analytical tools, but the more opaque market structures continue to represent potential blind spots in the system. As private credit continues to grow, the ability to identify signs of stress in a timely manner — including through advanced analytical tools and artificial intelligence systems — will become increasingly central to the stability of the global financial system. (photo by Immo Wegmann on Unsplash)
References
Agostini, M. (2026). The spillover effect: When stress in private credit reaches the leveraged loan market. Medium.
https://medium.com/@tarifabeach/the-spillover-effect-when-stress-in-private-credit-reaches-the-leveraged-loan-market-28b49983162c
Bloomberg. (2026). Private credit funds face redemption pressure as interest rates rise. Bloomberg News.
CNBC. (2025). Why private credit is becoming one of the fastest-growing areas of finance. CNBC.
European Central Bank. (2025). Financial stability review. European Central Bank.
Financial Times. (2025). Private credit’s rapid expansion raises questions about systemic risk. Financial Times.
Global Legal Insights. (2026). How technology and artificial intelligence are transforming private credit.
https://www.globallegalinsights.com/practice-areas/private-credit-laws-and-regulations/how-technology-and-ai-are-transforming-private-credit/
International Monetary Fund. (2025). Global financial stability report. International Monetary Fund.
Moody’s. (2025). Breakdown of banks’ annual reporting on private credit exposure. Moody’s Analytics.
Office of Financial Research. (2025). Nonbank financial intermediation and leverage monitoring. U.S. Department of the Treasury.
Private Debt Investor. (2025). How AI gives underwriting a boost.
https://www.privatedebtinvestor.com/how-ai-gives-underwriting-a-boost/
Private Equity Wire. (2025). AI increasingly integrated into private credit operations.
https://www.privateequitywire.co.uk/ai-increasingly-integrated-into-private-credit-operations/
Reuters. (2026). Private credit funds curb withdrawals amid redemption pressure. Reuters.
The Economist. (2025). The boom in private credit and the risks ahead. The Economist.
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