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**The Rise of Private Credit in Canada**
Private credit, a lending model often described as a shadowy alternative to traditional banking, is drawing the attention of the Bank of Canada amid concerns over its rapid expansion. While Canadian businesses have historically relied on banks for loans, private credit has emerged as a viable option for firms too small for conventional financing or unable to access bond markets. The central bank estimates that Canadian investors and banks collectively hold $500 billion in private credit loans, with most of this activity occurring in the United States.
This growth, driven by the demand for speed and flexibility, has not yet displaced traditional lending sources. Over the past decade, private credit has accounted for roughly 15% of loans to Canadian businesses—a figure that has remained stable. However, the Bank of Canada warns that this model, still in its early stages in Canada, could pose systemic risks if not carefully managed.
**Regulatory Gaps and Lack of Transparency**
One of the primary concerns surrounding private credit is its opacity. Unlike public markets, private lending deals are often negotiated behind closed doors, with no standardized reporting requirements. This lack of transparency makes it difficult for regulators and investors to assess the quality of loans or the stability of lenders.
Economists at the Bank of Canada highlighted this issue in a recent paper, noting that private credit operates “largely outside a regulatory environment.” This gap raises red flags, particularly as high-profile collapses in the U.S., such as the 2025 bankruptcy of First Brands Group—a company heavily financed by private credit—have sparked global alarm. In Canada, private real estate funds have also faced turmoil, with firms like Trez Capital Fund Management and Avenue Living Asset Management limiting withdrawals from their portfolios.
Peter MacKenzie, a senior policy analyst at the C.D. Howe Institute, emphasized the risks of this secrecy. “The opaqueness of private credit deals, combined with the absence of a clear definition, creates a risk that could ripple through the financial system,” he said. The absence of clear benchmarks or oversight means that even stable institutions like pension funds and insurers could face unexpected losses.
**Banks’ Exposure and Systemic Risks**
While private credit is often seen as a niche market, Canadian banks are increasingly exposed to it. Many banks lend to funds that specialize in private credit, effectively making them indirect participants in this space. The Bank of Canada acknowledges that these exposures are currently low-risk, but they could become problematic if private credit loans fail.
Bruce Flatt, CEO of Brookfield Corp., recently described recent turbulence in the sector as a “healthy adjustment” following a period of excessive capital and lax underwriting. However, he cautioned that a downturn in private credit could force banks to shift focus from lending to domestic businesses to bailing out struggling funds. This shift could tighten financial conditions, reducing the availability of capital for Canadian companies.
The central bank’s analysis also points to a potential domino effect. A sharp decline in private credit performance abroad could impact Canadian investors and businesses reliant on this financing. MacKenzie warned that “contagion” could spread if private credit loans default en masse, particularly in a prolonged economic downturn.
**Why It Matters**
The rise of private credit represents both an opportunity and a challenge for Canada’s financial system. On one hand, it offers businesses faster access to capital, particularly in an era where traditional lending can be slow or restrictive. On the other, its lack of regulation and transparency could create vulnerabilities that threaten stability. As private credit grows globally, Canada must balance supporting innovation in lending with safeguarding against risks. The Bank of Canada’s focus on this issue underscores the need for careful oversight—ensuring that this “shadow” market does not become a hidden threat to the broader economy. Without clear guidelines, the sector could evolve into a source of systemic risk, particularly if U.S. troubles spill over into Canada.
