Banks are stepping back from risks, leaving private credit at the forefront
A recent wave of stress in corporate credit in the US has brought both the banking sector and the private credit industry into the spotlight. The recent defaults of the auto-parts manufacturer First Brands and the subprime lender Tricolor triggered losses amounting to several hundred million dollars across both sectors, impacting leading players such as UBS, JP Morgan and Jefferies. For now, the situation appears to be contained, with no signs of contagion. However, the noise surrounding these incidents is creating uncertainty, pushing investors to now demand a better understanding of the real risks behind this topic, particularly regarding the private credit industry. This industry, which is still largely opaque, has gradually assumed many of the risks that banks have been reluctant to take on in recent years.
Big banks remain resilient
Despite these defaults and the current backdrop of geopolitical uncertainty (including rising tariffs), major US banks continue to post record profits in 2025, driven primarily by a jump in trading and investment banking fees, and a cost of risk that is still under control. Moreover, their balance sheets remain robust, and their loan books have shown a stable level of defaults for several years now.
This strong credit performance is largely the result of more than a decade of strong regulation, which has forced banks to become increasingly selective in the risks they take and to avoid exposures considered too risky or too costly from a capital perspective. A key instrument in this process has been the growing use of significant risk transfer (SRT) tools, which allow banks to offload risks from their balance sheets onto the financial markets.
In contrast, regional banks remain clearly more vulnerable, particularly due to their larger exposure to commercial real estate, a sector that is still sensitive in the US. For instance, several regional banks, such as Zions Bank or Western Alliance, recently reported large losses on defaulted loans tied to a Californian real estate group.
The role of private debt
In this environment, the private debt industry has absorbed much of the risk banks have either been unwilling or unable to hold. By its very nature, this sector is less transparent and is now under scrutiny as being both riskier and less regulated. However, the First Brands and Tricolor episodes are primarily linked to the syndicated loan market, particularly within collateralised loan obligations (CLOs), rather than to the core of the private debt market dominated by business development companies (BDCs). These cases therefore do not signal a broad deterioration in private credit.
Private credit has grown at a remarkable pace, at around 14% per year over the past decade to reach more than USD 3 trillion today, compared with roughly USD 2.3 trillion for the global high-yield market. As in any credit cycle, this level of expansion brings looser underwriting standards and the emergence of excesses, some of which are now surfacing.
Publicly listed BDCs, which provide rare transparency in the space, offer three key insights.
First, performance varies widely across platforms, and origination discipline remains inconsistent.
Second, stress indicators – non-accruals, leverage, and payment-in-kind (PIK) ratios – are generally contained, though some managers have begun targeted restructurings. For now, risk remains largely idiosyncratic, linked to specific cases rather than broad-based deterioration, with selectivity therefore becoming a decisive factor for managers.
Last, the credit cycle is now advanced, warranting a slower allocation pace and a more cautious stance. While a ‘subprime moment’ for private credit appears unlikely, the market has clearly reached maturity, and discipline – both from managers and investors – is essential. As long as negative headlines persist, the asset class is likely to remain under pressure.
A clear divergence has emerged: while large banks remain solid and benefit from tools that allow them to offload part of their risks onto the capital markets, the private debt industry has expanded rapidly by absorbing many of the same risks.
Nicolas Roth & Alvaro Cucchiara Velazquez
It is not unreasonable to assume that private credit has built up pockets of excesses over recent years, and that these may surface in the coming quarters through financial losses for certain players; however, contamination is not the base case for now.
The opinions expressed herein are correct as at 14 November 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
