• The New York Fed is reviewing major banks’ lending to private credit firms
• JPMorgan, Wells Fargo, Barclays and Morgan Stanley have reportedly faced examinations
• Officials are assessing exposure, risk management and collateral quality
• Bank lending to nonbank institutions has grown from around $300 billion in 2016 to more than $1.5 trillion
• AI disruption of software companies has intensified concerns over some private credit portfolios
• The ECB, Bank of England and SEC are also scrutinizing risks surrounding private assets and credit 

Fed officials have visited JPMorgan, Wells Fargo, Barclays and Morgan Stanley since the spring to assess their lending to private credit firms, according to people familiar with the reviews.

The examinations have included questions about total exposures, risk management and the quality of collateral supporting loans.

The Fed and the four banks declined to comment.

The scrutiny was prompted partly by JPMorgan’s decision in March to mark down significant portions of loans linked to private credit portfolios, particularly exposures involving software companies potentially threatened by artificial intelligence.

The Fed has reportedly completed its review at some institutions, including JPMorgan.

Such examinations are not unusual. The Fed regularly conducts on-site assessments and monitors emerging risks across supervised banks.

However, the review comes as connections between traditional banks and the rapidly expanding private credit industry attract increasing regulatory attention.

Bank lending to nonbank financial institutions has risen from around $300 billion in 2016 to more than $1.5 trillion, according to Federal Deposit Insurance Corporation data cited in the original report. It now represents approximately 11% of outstanding bank lending.

That growth illustrates an important shift following the 2008 financial crisis. As tighter regulation constrained banks’ direct participation in riskier lending, private credit firms expanded into the space.

Banks have subsequently regained indirect exposure by financing those lenders, often using private credit portfolios as collateral.

The resulting interconnectedness is attracting attention internationally. The European Central Bank has expanded its examination of banks’ private credit exposures, while the Bank of England said following its September Financial Policy Committee meeting that private credit could prove vulnerable to deteriorating financial conditions.

Valuations are another emerging concern. The Securities and Exchange Commission recently issued a statement reminding market participants of the importance of robust fair-value measurements and disclosures for private assets.

Private credit valuations have long faced criticism because loans are not continuously priced in public markets.

Questions have arisen when different lenders assign substantially different values to the same debt or when deterioration in a borrower’s performance is slow to appear in reported valuations.

Private lenders counter that independent third-party valuation specialists are commonly used and that underwriting remains disciplined.

AI has added another dimension to those concerns. Earlier this year, fears that generative AI could disrupt software businesses triggered investor anxiety about private credit funds heavily exposed to the sector.

Some funds faced unusually large redemption requests, in extreme cases approaching 40% of a fund during a quarter, although redemption limits generally prevented withdrawals on that scale.

Those pressures have subsequently eased at many private credit firms, while investor appetite for some software transactions has begun to recover.

But regulators’ attention suggests the broader concern has not disappeared.

With banks increasingly financing the institutions that themselves provide private credit, supervisors are examining whether problems originating in opaque private markets could ultimately migrate back onto regulated bank balance sheets.