Fed Probes Banks’ Ties to Private Credit as Redemption Pressure Mounts

The Federal Reserve has begun asking major U.S. banks for detailed information on their exposure to the private credit market.

Bloomberg reported that Fed examiners are seeking data on how much risk banks carry from private credit firms and whether stress in the sector could spread to the broader financial system. The queries aim “to assess the level of stress in the private credit industry and the potential for it to spill over to the wider financial system,” according to people familiar with the matter.

The requests come as several large private credit funds have restricted investor withdrawals in recent weeks.

Blue Owl Capital limited redemptions on its roughly $14 billion fund. BlackRock capped withdrawals on its $26 billion HPS Corporate Lending Fund after investors requested about $1.2 billion. Cliffwater capped exits on its $33 billion fund after investors sought to pull around 14 percent of shares.

Apollo Executive Questions Private Equity Valuations

Apollo Global Management executive John Zito told clients last month that private equity marks are broadly inaccurate. “I literally think all the marks are wrong,” Zito said. He added that loans to a typical mid-size software company from 2018 to 2022 could recover only 20 to 40 cents on the dollar in a slowdown.

Private credit has grown to roughly $2 trillion over the past decade. The sector connects banks, private equity firms, and institutional investors including pension funds and insurers.

Kevin Warsh Nomination Advances

Kevin Warsh, President Trump’s nominee to replace Jerome Powell as Fed Chair, submitted his financial paperwork to the Senate on April 13. His confirmation hearing could occur as early as late April, though Senator Thom Tillis has said he will block confirmation until a federal investigation into Powell is resolved. Powell’s term ends May 15.

Warsh is viewed as more supportive of liquidity and rate cuts than Powell.

Chain Street’s Take

Long-term investors and institutions that allocated to private credit for higher yields now face a test of how well those valuations hold up under pressure. When multiple large funds limit withdrawals in a short window and senior executives question marks across the industry, pension trustees, insurance portfolio managers, and bank risk officers pay close attention.

The Fed’s direct requests for exposure data show regulators want their own numbers rather than relying on public reports. For those responsible for protecting retirement savings and policyholder funds, the message is clear. Verify liquidity terms and understand where the credit ultimately lands before assuming stability.

Vigilance around opaque, long-duration assets remains essential in any market cycle. The current stress in private credit offers a reminder that higher promised yields always come with corresponding risks that can surface when redemption queues lengthen.