Private credit funds can count interest as income even when the borrower hasn’t sent them any cash, because some loan contracts let businesses add interest to what they owe.
That gives a company more time to pay, but it doesn’t extend the same courtesy to the fund, which could have borrowed money from a bank to finance the loan.
If you read the Federal Reserve’s new private credit accounts alongside its research on bank financing, you’d see that the separation between banks and nonbank lenders essentially disappears.
US-domiciled private credit vehicles owed banks $349 billion at the end of 2025, while other research showed borrowers were paying interest with additional debt. The fund can accept that payment method while its lender still expects cash.
Banks have protections that fund investors don’t, including collateral and (most importantly) priority in distributing money. Those protections can keep a bad business loan from becoming a bank loss, but exercising them can require a fund to produce cash before its borrowers are ready to pay.
The banks never left
According to the Fed’s Oct. 16 account of the market, private credit vehicles with a US footprint currently hold more than $2.6 trillion in assets, including foreign-based vehicles. Roughly $1.5 trillion of that consisted of private loans to US businesses, while the larger total includes equities and other investments.
Within the US-domiciled group, business development companies (BDCs) owed banks $181 billion at the end of 2025. Private debt funds owed another $150 billion, while interval and tender-offer funds, which offer limited opportunities to sell shares back, owed $18 billion.
Private credit’s $349 billion in bank borrowing
Outstanding bank loans to US-domiciled private-credit vehicles at year-end 2025. Published amounts are rounded to the nearest $1 billion. These are fund liabilities, not bank losses or unused credit lines, and don’t capture every bank exposure to private credit.
The Fed had previously assigned those bank loans to financial companies abroad. Correcting that classification makes the financing easier to see and follow, although it isn’t evidence that individual banks concealed their exposure.
The national accounts had already attributed money supporting American private lending elsewhere.
Investors supply capital that funds can lend for years, making private credit a pretty good fit for insurers with long-term obligations. Borrowing adds to the money available, and banks can supply revolving credit lines that funds draw and repay as they need financing.
Depending on the contract, a bank can lend against investment assets or investors’ commitments to contribute capital. Funds gain more lending capacity by accepting obligations to institutions, with repayment terms and the authority to enforce them.
Fed researchers examining BDC financing found that five banks supplied roughly two-thirds of drawn bank lending in their 2012–2023 sample. BDCs rarely replaced their banking partners, so a lender demanding more expensive financing isn’t necessarily competing with a long queue of willing replacements.
The Fed’s financing study also found that banks charged BDCs a premium during monetary tightening compared with similarly rated borrowers at the same bank, despite BDC loans generally having seniority and collateral.
The cost of moving business lending into funds can reach companies through the rates their private lenders charge them.
Private credit lenders still expect cash
Boston Fed researchers examined filings from 168 BDCs, covering nearly 890,000 company quarter loan observations.
By early 2026, about 10% of BDC loans were actively using payment-in-kind interest (PIK), up from about 6% in 2022. Their count excluded contractual options borrowers hadn’t exercised.
The increase extended across nearly every industry in the Boston Fed sample, rather than being explained mainly by funds adding businesses that routinely defer interest. Construction had one of the highest increases, from less than 5% of loans in 2022 to nearly 20% by early 2026.
Borrowers using floating interest rates also faced higher debt costs as benchmark rates increased over that period.
PIK lets a business add interest to its outstanding debt instead of paying that interest in cash. Sometimes that flexibility is negotiated from the beginning so a company can spend more on operations, but it can also let a struggling borrower keep servicing a loan without finding money it doesn’t have.
The lender receives a legal claim to a larger repayment, and the income depends on eventually collecting it. We can’t treat every PIK loan as distressed, but we also can’t treat interest added to debt as cash available to pay the fund’s expenses or its own creditors.
Private credit funds can cover those bills with cash reserves and payments from other borrowers, provided those resources are sufficient.
Their banks aren’t automatically required to defer interest because the underlying businesses have done so, and a fund accommodating more borrowers may have less cash coming in while its own payments continue.
Financing agreements can also restrict how much a fund borrows against eligible collateral. If loan valuations fall or assets stop qualifying, the contract may require additional collateral or repayment, even when the fund’s total assets still exceed its debts.
That leaves managers deciding whether to use reserves or sell investments that weren’t intended for a quick exit. Cutting new lending conserves money, but businesses expecting to refinance then have to find another lender or accept worse terms.
Investor withdrawals add demand where funds offer repurchase programs, although limits on those repurchases can slow the outflow.
Listed BDC shares work differently: someone selling on an exchange gets paid by another buyer, so a falling share price doesn’t automatically remove cash from the company.
What Barclays says it owns
Banks also have an incentive to limit the shareholder capital required against their exposures, because committing less capital can improve the return earned on a transaction. Whether an exposure belongs in the banking book or trading book determines which capital rules apply.
On Oct. 19, the Financial Times reported that the UK’s Prudential Regulation Authority was looking into an insider complaint about Barclays’ allocation of private credit-linked total return swaps to its trading book.
Barclays told Reuters its treatment complied with accounting and regulatory capital requirements and was supported by internal governance and external advisers.
Total return swaps allow parties to transfer a loan’s economic performance without transferring ownership. One party receives the income and gains and bears the losses, while paying financing charges, allowing private-debt exposure to be financed through a derivative contract.
The PRA had addressed this problem in an April 2025 letter to bank finance chiefs. It said putting hard-to-sell assets into tradable form wasn’t sufficient on its own to justify trading-book capital treatment.
Barclays reported £15 billion in total private credit exposure, mostly held in its banking book. The swaps referenced roughly £1.5 billion in underlying assets, with current mark-to-market exposure of about £300 million.
Senior claims and collateral can protect banks while investors absorb losses, but enforcing those protections can reduce financing available to funds and their borrowers.
The disruption can begin with a solvent lender demanding payment under a contract.
Bitcoin doesn’t need to hold a private credit loan for this kind of stress to reach its market. Investors who need cash can sell assets unrelated to the original loss, while lenders reducing financing can leave traders with less money to maintain positions.
