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The Financial Stability Board (FSB) has issued a stark warning regarding the burgeoning private credit sector, which has become a crucial funding source for the artificial intelligence (AI) industry. In its latest report, the FSB cautioned that the increasing reliance on private lenders to finance data centres and infrastructure may expose investors to significant risks, particularly in the event of an economic correction.
Private Credit: A Growing Dependency
The private credit market has seen rapid growth, with the healthcare, services, and technology sectors emerging as the largest recipients of its funding. Notably, AI companies have accounted for over a third of private credit transactions in 2025, a substantial rise from 17% in the preceding five years. This trend indicates not only the industry’s escalating capital demands but also a potential vulnerability in the financial landscape.
The FSB’s report highlights the inherent risks associated with such concentrated lending. It warns that private credit funds’ focus on specific sectors could expose them to unique risks that may arise from regional or industry-specific shocks. For instance, should there be a significant downturn in asset valuations—accelerated by a potential oversupply of data centres—investors could face considerable credit losses.
The Risks of Overextension
The FSB has identified several factors that could precipitate a downturn, including electricity supply issues critical for the construction and operation of data centres. If power shortages disrupt the development of these facilities, it could lead to project delays or cancellations, putting further strain on investor returns. Furthermore, the potential for an oversupply of data centres could lead to diminished demand for AI services, adversely impacting valuations.
Compounding these concerns is the nature of private credit lending itself. Unlike traditional banks, which operate under stringent regulatory frameworks, private credit firms often lend using investor capital rather than customer deposits. This has resulted in a situation where borrowers typically present lower credit scores and higher debt levels compared to those seeking loans from conventional banks.
Traditional Banks and Private Credit Exposure
As the private credit landscape expands, traditional banks are increasingly entwined with this sector. They are either directly lending to private credit funds, financing riskier portfolios, or providing loans to companies that are also borrowing from private credit sources. This interconnectedness raises the stakes for banks, as they may not possess complete information about the borrowers they are financing, a factor that has been illustrated by recent corporate collapses.
The FSB pointed to the failures of two US automotive firms, Tricolor and First Brands, which were backed by private credit. Both companies faced fraud allegations, prompting questions about the due diligence conducted by private lenders. Major banks, including JP Morgan and Barclays, reported losses linked to Tricolor’s downfall, while others such as UBS and Jefferies had significant exposure to these failed enterprises. The report underscores a worrying trend: how intertwined the banking sector has become within the complex web of corporate credit.
Why it Matters
The FSB’s findings serve as a clarion call for both investors and regulators regarding the growing reliance on private credit within the AI sector. As the technology industry continues to expand, the implications of this funding model could lead to widespread repercussions. A sudden economic downturn or sector-specific shock could not only threaten the stability of private lenders but also reverberate through traditional banking institutions, potentially leading to a broader financial crisis. As such, stakeholders must navigate this landscape with caution, ensuring proper risk assessments and regulatory oversight are in place to mitigate potential fallout.
