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As the artificial intelligence sector continues its rapid expansion, the Financial Stability Board (FSB) has issued a stark warning regarding the growing reliance of AI companies on private credit. A new report highlights the potential risks associated with this trend, particularly as firms in technology, healthcare, and services increasingly turn to private lenders for funding essential infrastructure such as data centres. The FSB cautions that a downturn in asset valuations could lead to significant losses for private credit investors.
Surge in Private Credit Borrowing
The FSB’s report reveals that private credit has become a lifeline for AI firms, which accounted for over a third of all private credit transactions in 2025 — a notable increase from just 17% in the previous five years. This surge is indicative of the sector’s urgent need for resources to build and maintain the data infrastructure critical for AI operations. However, the report warns that this concentrated borrowing could expose private credit funds to unique risks, potentially jeopardising the financial stability of both lenders and borrowers.
The FSB emphasised that a significant dip in asset valuations could arise from various factors, including supply chain disruptions related to electricity shortages, which are crucial for operating data centres. Such scenarios could result in project delays or cancellations, thereby hampering the growth trajectory of AI companies and adversely affecting their valuations.
Risks of Private Credit Financing
The increasing influence of private credit in financing AI ventures has raised eyebrows within the financial community. The FSB points out that these loans are often extended to borrowers with lower credit ratings and higher debt levels than those seeking traditional bank financing. The implications are concerning, particularly as private credit operates outside the traditional regulatory frameworks that govern banks.
The report indicates a troubling trend: as private lenders take on more risk, traditional banks are inadvertently becoming entangled in this opaque web of credit. Many banks are now financing private credit firms or extending loans to companies that are simultaneously reliant on private credit sources. This interconnectedness raises critical questions about transparency and the quality of information available to lenders, especially in light of recent corporate failures linked to private credit.
Recent Failures Highlighting Systemic Risks
The FSB’s concerns are underscored by the high-profile collapses of two private credit-supported automotive companies in the United States, Tricolor and First Brands. These failures, accompanied by allegations of fraud, have prompted a reassessment of lending practices within the private credit sector. Several prominent banks, including JP Morgan and Barclays, reported financial losses connected to these collapses, while others, such as UBS and Jefferies, found themselves significantly exposed.
These incidents serve as a cautionary tale about the risks inherent in private credit arrangements. The FSB argues that the integration of banks into the private credit landscape amplifies systemic risks, as institutions may not fully understand the complexities involved in these loans. The report stresses the importance of vigilance and better risk assessment practices to mitigate potential fallout.
Why it Matters
The rapid growth of the AI sector is undeniably transformative, yet the rising dependence on private credit to fuel this expansion raises profound concerns about financial stability. As AI firms continue to push the envelope in data infrastructure development, the potential for significant credit losses looms large, particularly if the market experiences a downturn. The FSB’s warning serves as a crucial reminder for stakeholders to approach private credit with caution, ensuring that robust risk management practices are in place to safeguard against the volatile nature of this burgeoning market.
