Wall Street braced for a private credit meltdown. The risk of one is rising

• Banks have tripled their exposure to nonbank financial institutions, with JPMorgan's loans to this sector growing from $50 billion in 2018 to $160 billion in 2025, and total bank loans to NDFIs reaching $1.14 trillion
• Private credit lenders mark their own loan values, creating incentives to disguise or delay recognition of borrower problems, as seen when Renovo's debt was valued at full worth until shortly before being marked down to zero
• Defaults among private loans are expected to rise in 2026, with borrowers increasingly using payment-in-kind options to avoid defaulting, while Trump-era deregulation may further weaken underwriting standards as competition intensifies

Summary: Wall Street Private Credit Risk Assessment

Key Developments

Private credit sector faces mounting concerns following recent bankruptcies and warnings from prominent financial leaders. The industry has grown from $3.4 trillion in 2025 to a projected $4.9 trillion by 2029, driven by post-2008 regulations that pushed riskier lending away from traditional banks.

Market Impact

Major private credit-linked companies including Blue Owl Capital, Blackstone, and KKR are trading well below recent highs. September bankruptcies of two private credit-backed firms (names partially redacted in article) triggered industry scrutiny.

Notable Warnings

• JPMorgan Chase CEO Jamie Dimon cautioned in October that credit problems are "rarely isolated," using his "cockroach" analogy
• Jeffrey Gundlach predicted private credit could trigger the next financial crisis, citing poor lending practices
• Investment banks JPMorgan and others disclosed losses tied to auto industry bankruptcies

Risk Factors

Bank exposure to non-depository financial institutions (NDFIs) reached $1.14 trillion in 2025. JPMorgan's NDFI lending tripled from $50 billion (2018) to $160 billion (2025).

Key concerns include:

• Opaque valuation practices with lenders self-marking loans
• Rising defaults expected, particularly among lower-quality borrowers
• Increased payment-in-kind arrangements suggesting borrower stress
• Example: Renovo's debt marked at full value until shortly before complete write-off

Expert Analysis

Moody's Analytics economist Mark Zandi warns that Trump administration deregulation combined with increased competition could weaken underwriting standards. Duke Law professor highlights difficulty assessing accurate loan valuations in this "extraordinarily large" but non-public market. Regulatory oversight remains limited compared to traditional banking sector.