Banks Hold $349 Billion in Private Credit Fund Debt as Payment Concerns Mount

US-domiciled private credit vehicles owed banks $349 billion at the end of 2025, according to Federal Reserve data, highlighting the deep integration between traditional banking and the nonbank lending sector.

The debt breaks down across multiple fund types: business development companies (BDCs) owed $181 billion, private debt funds owed $150 billion, and interval and tender-offer funds owed $18 billion. These are fund liabilities representing actual bank loans, not unused credit lines or unrealized bank losses.

The Payment-in-Kind Problem

A growing concern is how private credit funds handle interest payments. Many loan contracts allow borrowers to add unpaid interest to their outstanding debt rather than pay it in cash. This arrangement, known as payment-in-kind (PIK) interest, has expanded significantly.

Boston Federal Reserve researchers examining 168 BDCs covering nearly 890,000 company loan observations found that about 10% of BDC loans actively used PIK arrangements by early 2026, up from roughly 6% in 2022. The increase appeared across nearly every industry, with construction experiencing particularly sharp growth from less than 5% of loans in 2022 to nearly 20% by early 2026.

While PIK arrangements can provide operational flexibility for businesses, they create a structural mismatch: funds record interest as income even when no cash changes hands, yet their bank lenders typically expect cash repayment regardless of whether underlying borrowers have paid in kind.

Funding and Collateral Dynamics

Private credit funds borrow from banks using various mechanisms, including revolving credit lines and loans secured against investment assets or investor commitments. Banks hold protections that fund investors lack, including collateral priority and seniority in distributions.

Federal Reserve research on BDC financing from 2012 to 2023 found that five banks supplied roughly two-thirds of drawn bank lending to BDCs, with lenders rarely being replaced. Banks charged BDCs higher rates during periods of monetary tightening compared with similarly rated borrowers, despite BDC loans typically having seniority and collateral backing.

Scale of Private Credit Activity

US-domiciled private credit vehicles currently hold more than $2.6 trillion in assets when including foreign-based vehicles, according to Federal Reserve accounts. Roughly $1.5 trillion consists of private loans to US businesses, with the broader total including equities and other investments.

Regulatory Scrutiny

Banking regulators have begun examining how private credit exposures are classified for capital requirements. In October, the UK's Prudential Regulation Authority opened an inquiry into Barclays' allocation of private credit-linked total return swaps to its trading book, which can affect capital rules. Barclays reported £15 billion in total private credit exposure, with roughly £1.5 billion referenced through swaps carrying current mark-to-market exposure of approximately £300 million.

The regulatory authority previously noted that converting hard-to-sell assets into tradable form was not sufficient on its own to justify trading-book capital treatment.