US Banks’ Exposure to Private Equity Surges—Experts Warn of Potential Contagion

Following the bankruptcies of subprime auto lender Tricolor and auto parts supplier First Brands Group, which rattled the credit markets, a Moody’s report has sounded the alarm over U.S. banks’ high exposure to private equity and private credit.

U.S. banks’ exposure to private equity has reached $300 billion, Moody’s Investors Service revealed in an Oct. 21 report.

The credit agency stated that the increasing interdependence between banks and private credit firms poses unique challenges because the two are both partners and competitors in the lending market.

“As banks compete with non-bank lenders and simultaneously finance them, asset quality challenges may surface,” Moody’s stated in the report.

“The recent bankruptcy of Tricolor shows that bank lending to [non-depository financial institutions] can result in significant losses, and underwriting and collateral controls can fail even when loans are secured.”

Tricolor is a Dallas-based chain of used car dealerships and a primary subprime auto lender serving thousands of low-income individuals, including those with low credit or no credit.

The company and its affiliates each filed a petition on Sept. 10 to transition from Chapter 11 of the U.S. Code to Chapter 7, leading to the liquidation of the business and the sale of its assets.

Meanwhile, auto parts supplier First Brands Group and 98 affiliated debtors filed for Chapter 11 bankruptcy on Sept. 28. Although the company did not provide financial services, it had a web of financing deals with private lenders.

The failures of these companies have sent shockwaves through the markets in recent weeks, as their lenders, including JPMorgan Chase, Jefferies Financial, and regional banks Western Alliance Bancorp. and Zions Bancorp., disclosed hefty losses.

Illiquid and Opaque Assets

Moody’s identified two primary risks. The first is that bank loans to private credit managers are often concentrated among a small group of firms, creating potential systemic vulnerabilities.

The second is the lack of transparency in private credit instruments, many of which are illiquid and internally valued, making them difficult to price in volatile conditions.

The agency traced this growing exposure back to the aftermath of the 2008 to 2009 financial crisis, when stricter capital and regulatory requirements limited the ability of banks to expand beyond traditional lending.

In response, many institutions turned to partnerships with alternative asset managers to maintain lending flows while managing balance sheet constraints.

The result has been explosive growth.

The Federal Reserve estimated private credit lending at $1.34 trillion in 2024, while research firm Future Standard placed the U.S. market slightly lower, at $1.25 trillion, with the global total nearing $2 trillion.

The central bank attributed the surge to investors’ search for yield and businesses’ demand for flexible financing. But it also warned that growing interconnectedness between banks, private lenders, and other financial institutions could amplify risks during periods of stress.

“While immediate risks from private credit vehicles appear limited due to their moderate use of leverage and long-term capital lockups, the lack of transparency and understanding of the interconnectedness between private credit and the rest of the financial system makes it difficult to assess the implications for systemic vulnerabilities,” the Fed stated.

A Call for Caution

Financial analysts share Moody’s concerns.

Michael Ashley Schulman, chief investment officer at Running Point Capital, described the relationship between banks and private credit as “a dating profile for systemic risk,” warning that opacity and illiquidity could trigger problems if market conditions worsen.

“Banks’ exposure to private vehicles has quietly ballooned, particularly in the [post-zero interest rate policy] era, as [private equity] and private credit morphed from niche alternatives into the prom kings of capital markets,” Schulman told The Epoch Times.

“However, valuation opacity and liquidity mismatches can quickly turn ‘it’s complicated’ into ‘uh-oh.’”

Alex Lubyansky, a mergers and acquisitions attorney, said banks’ exposure to private credit has expanded far beyond the initial scope.

“What started as relationship lending turned into a full ecosystem of subscription lines, [net asset value] loans, and risk transfers,” he told The Epoch Times.

“If private credit weakens, liquidity draws and valuation stress could hit banks faster than most expect.”

Experts agree that stronger due diligence is essential. They warn banks to scrutinize the quality of borrowers, leverage levels, and covenant protections—especially amid elevated interest rates.

Schulman emphasized that not all exposure is problematic.

“Banks that treat private markets as a side business may be fine,” he said.

“The ones that overextended during the boom years could face their WeWork moment if liquidity dries up,” he noted, referring to the company’s Chapter 11 bankruptcy filing in 2023.

Both Moody’s and the Fed stressed that while private credit’s expansion has diversified funding sources, it has also woven a web of complex financial linkages. If market turbulence strikes, those ties could expose banks to unexpected shocks.