FSB warns AI boom in private credit risks ‘sizeable’ losses

TL;DR:

• The Financial Stability Board (FSB), which monitors financial authorities including central banks across 24 countries, has warned that the private credit industry’s role in fuelling the AI boom could backfire — with a sharp correction leading to “sizeable” losses for private credit investors.
• AI accounted for more than a third of private credit deals in 2025, up from 17% over the previous five years. AI loan repayments are exposed to electricity-supply shortfalls, datacentre construction delays and possible AI-demand oversupply.
• Resultsense view: this is the most explicit FSB warning yet on AI infrastructure financing risk and lands the same week as reports that JPMorgan, Morgan Stanley and SMBC are scrambling to offload AI datacentre debt. UK pension funds and insurers with private-credit exposures should ask their managers explicitly about AI concentration.

The new FSB report finds that healthcare, services and tech sectors have become the biggest borrowers of private credit, with AI firms increasingly turning to private lenders to fund datacentres and other infrastructure. The watchdog warned that “this focus on specific sectors may leave private credit funds exposed to idiosyncratic risks … [and] increase exposure to region or industry-specific shocks”.

The two-channel risk

The FSB flags two correlated risk channels for AI loans. First, electricity-supply shortfalls. Datacentre operation is electricity-intensive; “any significant shortfall in the supply of electricity, a critical factor in the construction and operation of datacentres, could lead to delays or cancellations of projects”. Construction-loan covenants typically tighten under those scenarios, accelerating losses.

Second, AI-demand oversupply. The watchdog warned that AI company valuations could be hit if investments lead to an oversupply of datacentres outpacing demand for AI compute, leading to lower-than-expected returns for investors. “A sharp correction in asset valuations, which have increased rapidly, could lead to sizeable credit losses to private credit investors.”

Bank exposure through the back door

Critically, traditional banks are increasingly exposed to private credit in three ways: lending directly to private credit funds; financing riskier fund portfolios; and lending to firms that are simultaneously borrowing from private credit firms. A growing number of banks are also partnering with asset managers on private credit deals, exposing them to “an opaque sector where lenders may have only partial information about borrowers”.

The FSB cited last year’s collapse of Tricolor and First Brands — two private-credit-backed US auto firms — as showing how “tightly integrated” banks can become in corporate-credit exposures. JPMorgan, Barclays, UBS and Jefferies all reported losses or significant exposures from those failures.

Recent multibillion-pound withdrawals have already forced some private credit funds to cap redemptions — a sign retail and institutional confidence is wobbling.

UK relevance

Three takeaways for UK investors. First, UK insurers and pension schemes with private-credit allocations should confirm with managers how AI infrastructure exposure is sized, sectorally concentrated and stress-tested. Second, UK retail private-credit investors via the LSE-listed Business Development Company structures should expect tighter regulator scrutiny on disclosure of AI exposure. Third, the parallel news that JPMorgan, Morgan Stanley and SMBC are seeking to offload AI datacentre construction debt at scale gives a market-side signal that bank balance sheets are running into limits — an early warning that the FSB report formalises.

Looking forward

The next data point to watch is the FCA’s expected position paper on private-credit conduct rules, due in Q3 2026, which is likely to incorporate FSB framing on sectoral concentration. The Bank of England’s Financial Stability Report — expected in December — will also include AI infrastructure exposures explicitly, per the FPC’s October 2025 minutes. UK CFOs running long-dated AI capex plans should watch both publications for refinancing-risk signals.