Banks are owed $349B by private credit funds that may not be collecting cash from borrowers

Private credit funds can count interest as income even when the borrower hasn't sent them any cash, because some loan contracts let businesses add interest to what they owe.

That gives a company more time to pay, but it doesn't extend the same courtesy to the fund, which could have borrowed money from a bank to finance the loan.

If you read the Federal Reserve's new private credit accounts alongside its research on bank financing, you'd see that the separation between banks and nonbank lenders essentially disappears.

US-domiciled private credit vehicles owed banks $349 billion at the end of 2025, while other research showed borrowers were paying interest with additional debt. The fund can accept that payment method while its lender still expects cash.

Banks have protections that fund investors don't, including collateral and (most importantly) priority in distributing money. Those protections can keep a bad business loan from becoming a bank loss, but exercising them can require a fund to produce cash before its borrowers are ready to pay.

According to the Fed's Oct. 16 account of the market, private credit vehicles with a US footprint currently hold more than $2.6 trillion in assets, including foreign-based vehicles. Roughly $1.5 trillion of that consisted of private loans to US businesses, while the larger total includes equities and other investments.

Within the US-domiciled group, business development companies (BDCs) owed banks $181 billion at the end of 2025. Private debt funds owed another $150 billion, while interval and tender-offer funds, which offer limited opportunities to sell shares back, owed $18 billion.

The Fed had previously assigned those bank loans to financial companies abroad. Correcting that classification makes the financing easier to see and follow, although it isn't evidence that individual banks concealed their exposure.

The national accounts had already attributed money supporting American private lending elsewhere.

Investors supply capital that funds can lend for years, making private credit a pretty good fit for insurers with long-term obligations. Borrowing adds to the money available, and banks can supply revolving credit lines that funds draw and repay as they need financing.

Depending on the contract, a bank can lend against investment assets or investors' commitments to contribute capital. Funds gain more lending capacity by accepting obligations to institutions, with repayment terms and the authority to enforce them.