Two Federal Reserve banks are preparing to survey the private credit industry directly, an attempt to bring visibility to a $1.3 trillion financing market that has grown up almost entirely outside the reach of banking supervision.

The Dallas and New York Federal Reserve banks will launch a pilot survey of the estimated $1.3 trillion private credit market after the third quarter closes, the New York Fed said in a statement Wednesday. The two banks described the effort as exploring lending trends in the U.S. private credit direct lending market.

The New York Fed said the survey will produce insight into credit availability, how credit is being provided, how lending standards are evolving in private credit, and what all of it means for the broader economy and for monetary policy.

Segmenting by Borrower Size

The design of the survey signals what the central bank actually wants to know.

It will divide the market into three tiers based on borrower size: an upper middle market covering companies with more than $100 million in earnings before interest, taxes, depreciation and amortization; a middle market spanning $30 million to $100 million in EBITDA; and a lower middle market below $30 million.

That structure matters because the risk profile is not uniform. Lending to a company generating $150 million in EBITDA is a fundamentally different exercise than lending to one generating $20 million, and until now regulators have had limited ability to distinguish between the two in aggregate data.

Initial findings are expected in early 2027.

Why the Fed Is Looking Now

Private credit is a post-2008 creation. It emerged as a way to finance private equity buyouts when bank lending contracted after the financial crisis, then expanded into a primary source of debt for riskier businesses, pulling in capital from investors hunting yield.

The growth has been extraordinary. The U.S. market went from roughly $500 billion to $1.3 trillion over five years, reaching a scale comparable to the markets for bank loans and corporate bonds. Industry figures put it higher still — an LSTA survey of member firms pegged the U.S. private corporate credit market above $1.5 trillion, surpassing both the broadly syndicated loan market and the high-yield market.

The sector remains small relative to traditional banking, but it has drawn persistent concern over the quality of lending standards and the absence of transparency.

Fed Vice Chair for Supervision Michelle Bowman framed the issue plainly in congressional testimony earlier this year, describing private credit as a small share of bank lending categories but calling it opaque enough that the central bank needs more information from the institutions it regulates.

The Banking Connection

The reason this is a supervisory question rather than an academic one is that banks are not actually on the sidelines.

Credit lines extended by the largest U.S. banks to private credit vehicles rose roughly 145% between 2020 and 2024, reaching about $95 billion. Moody’s has estimated U.S. bank exposure to private credit at roughly $300 billion, part of more than $1.2 trillion in loans to non-depository financial institutions overall.

Banks lost origination share to private lenders and responded by financing them instead. The credit risk moved off bank balance sheets; the counterparty risk did not entirely follow.

Stress Is Already Showing

The timing of the survey is not accidental. Investors have accelerated redemption demands this year from business development companies — the publicly traded funds that hold much of this debt — driven by worries about competition, declining returns, and fears that artificial intelligence will disrupt the software businesses many of these funds have financed.

Some funds have limited withdrawals in response, a dynamic that has drawn comparisons to earlier liquidity episodes in less-transparent corners of finance.

What It Means for Middle-Market Borrowers

For the thousands of mid-sized American companies now financed through direct lending rather than bank credit, the survey has practical stakes.

Private credit became the default option for businesses that were too small for the syndicated loan market and too leveraged for a traditional bank. Speed and flexibility were the selling points — a direct lender can close in weeks with a covenant package negotiated one-on-one.

If the Fed’s findings prompt tighter standards, either through regulation or through banks pulling back their financing lines, the cost and availability of that capital changes for borrowers who now have few alternatives.

Global private credit assets grew from roughly $158 billion in 2010 to nearly $2 trillion by mid-2024, and Moody’s projects the market could double past $3 trillion in assets under management by 2028.

The Fed has decided it can no longer afford to be measuring a market that size from the outside.

JBizNews Desk | New York

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