The rapid expansion of private credit in the AI sector has sparked warnings of potential financial instability from the Financial Stability Board (FSB). This global financial watchdog, which oversees central banks and other financial institutions across 24 countries, has highlighted the risk of substantial losses due to a possible market correction. The FSB’s latest report reveals that healthcare, services, and technology industries are now the predominant borrowers of private credit. AI companies, in particular, have increasingly relied on private lenders to finance vital infrastructure such as datacentres. In 2025, AI firms were responsible for over a third of private credit transactions, up from 17% in the previous five years.
The FSB cautions that the concentration of loans in specific sectors could leave private credit funds vulnerable to unique risks and sector-specific disruptions. In the case of AI loans, the board warns that a sudden drop in asset valuations—which have risen swiftly—could result in significant credit losses for investors involved in private credit. A critical factor that could trigger such a correction is a considerable shortage in electricity supply, essential for the construction and operation of datacentres. Any delays or project cancellations due to this would impact valuations and potentially lead to financial setbacks.
Additionally, the FSB notes that an oversupply of datacentres, spurred by substantial investments, might surpass the actual demand for AI services. This imbalance could negatively affect company valuations and yield lower-than-anticipated returns for investors. Amid these concerns, there has been a noticeable uptick in withdrawals from private credit funds, as investors grow wary of the potentially risky loans arranged by these firms. Unlike traditional banks, which use customer deposits, private credit lenders operate outside the regulated banking system using investor funds, prompting some funds to limit client withdrawals recently.
Advocates of private credit argue that these lenders are adept at managing risks and tailoring loan arrangements. Nonetheless, the FSB points out that borrowers in this sector generally have lower credit scores and higher debt levels compared to those seeking loans from conventional banks. Moreover, traditional banks are increasingly intertwined with the private credit market. They do so by providing loans directly to private credit funds, financing more volatile fund portfolios, or lending to companies that simultaneously borrow from private credit firms. This growing interconnection signals a broader exposure of traditional banks to the risks inherent in private credit.