"U.S. Private Credit Market Could Spread Risks Across Financial Sector... Integrated Regulation and Supervision Needed"

Korea Capital Market Institute Report on the U.S. Private Credit Market
Raises the Possibility of Systemic Risks from U.S. Private Credit Funds
Presents Three Policy Implications for the Domestic Market

An analysis has found that as U.S. private credit becomes closely intertwined with the life insurance industry, banks and other parts of the financial sector, deteriorating conditions in the private credit market could spread into a systemic risk. Some have therefore called for integrated financial regulation and supervision in the domestic market as well.

On October 14, Shin Bo-sung, a senior research fellow at the Korea Capital Market Institute, presented policy implications for the domestic market in a report titled “Soundness, Liquidity and Systemic Risk in the U.S. Private Credit Market.” He said, “The developments observed in the U.S. private credit market show that an integrated approach to financial regulation and supervision is needed.” The private credit market refers to loans made by nonbank financial institutions through funds to unlisted, privately held midsize companies.

“Over the past two decades, the distinctions between financial sectors have weakened, and the overall financial system is more tightly interconnected than ever,” Shin said. “In this situation, continuing to treat each sector as a separate domain and maintain a siloed perspective could mean failing to identify systemic risks.” He added, “Particular attention should be paid to the risk of private equity funds outside the regulatory perimeter becoming connected to regulated financial sectors.” He also highlighted the need to guard against prolonged expansionary monetary policy and to exercise caution when considering investment products recommended by global financial firms.

Redemption Requests for U.S. Private Credit Funds Rise...Concerns Grow Over Soundness and Liquidity

Concerns about soundness and liquidity are mounting in the U.S. market as redemption requests for large private credit funds increase. Private credit funds’ profitability depends on borrowers’ ability to repay, but high interest burdens and deteriorating profitability have recently been weighing on them. The share of payment-in-kind (PIK) loans, in which borrowers pay interest by taking out additional loans from the fund rather than paying it in cash, has also risen since 2023. The PIK share climbed from 5–6% in 2022 to 12% in 2025. These factors all weigh on fund performance.

Liquidity concerns have also emerged as private credit funds increasingly move from closed-end structures to semi-open-end structures. “For example, the assets of semi-open-end business development companies (BDCs) amounted to just $10 billion in 2019, but reached $300 billion in 2025–2026,” Shin said. “Semi-open-end structures allow periodic redemptions up to a certain percentage of a fund’s net asset value (NAV), creating a liquidity mismatch between assets and liabilities and undermining fund stability.”

The consensus is that the current private credit market, valued at about $2.5 trillion, is not large enough to pose a systemic risk. But Shin said it would be difficult to conclude that the market is too small to matter. He cited the fact that the estimated market size does not account for borrowers taking on multiple loans, and that modified forms of private credit should also be considered. As an example of modified private credit, he described a fund transferring corporate loans it holds to a special purpose vehicle (SPV), which then issues private asset-backed securities (private ABS) backed by those loans, with a life insurance company purchasing the securities. The market for private ABS and private bonds issued in connection with private credit funds amounts to $849 billion.

“A Sharp Adjustment in Fund NAV Could Pose a Systemic Risk”

The report warned that a sharp adjustment in fund NAV could pose a systemic risk. Profitability is deteriorating at software companies and other firms that have borrowed from funds, while their interest burdens are rising. “If the soundness of borrowers deteriorates rapidly, there will inevitably be limits to how gradually fund NAV can be adjusted,” Shin said. “If a scenario in which the decline in NAV exceeds a critical threshold becomes reality, the problems in the private credit market will not be confined to that market.”

He expects systemic risk to emerge in two stages. First, losses at institutional investors such as pension funds that have invested in the funds, as well as at life insurers and banks with direct or indirect exposure to private credit, exceed a critical threshold. Institutional investors then begin adjusting their asset allocations, while life insurers and banks sell highly liquid assets such as high-quality bonds to meet regulatory capital requirements, causing asset prices to fall.

“In most cases, assets whose prices are falling are also held in significant quantities by financial firms in other sectors,” Shin said. “This will create a channel through which a crisis can spread via commonly held assets.” He added, “Those hit particularly hard will be investment banks with high levels of debt and heavy reliance on short-term borrowing, along with some hedge funds, because as the value of their assets falls, creditors that made short-term loans secured by those assets will compete to call in their loans.”

He emphasized that once leverage and short-term borrowing also become problems, all the conditions for systemic risk will be in place. “Once liquidity stress and falling asset prices begin to reinforce each other, it will only be a matter of time before the soundness of the entire financial sector is undermined,” Shin said.

This content was produced with the assistance of AI translation services.