Dominoes Fall. US Private Credit Crisis Is Spreading to Dollar Bank Loan Pools

TradingKey - A private credit crisis accelerating within the U.S. financial system is spreading from the shadow banking system to traditional banking.

Deutsche Bank ( DB) shares tumbled nearly 7% on Thursday, a plunge triggered by multiple risk exposures disclosed in the bank's annual report, particularly its high-profile private credit holdings of up to $30 billion, which have drawn significant market attention.

According to the annual report released Thursday, Deutsche Bank's private credit loan portfolio at amortized cost has risen to 25.9 billion euros (approximately $30 billion), up from 24.5 billion euros in 2024. This scale makes Deutsche Bank a major player in the global private credit market, accounting for approximately 5% of its total loans.

The bank classified private credit as a "key risk" area, noting that the market is currently facing a triple challenge: increasing investor redemption pressure, regulatory scrutiny of industry underwriting standards, and the impact of AI developments on the business models of certain borrowers such as software manufacturers.

This means that the turmoil in this $1.8 trillion market has not stopped at the shadow banking system; its impact on traditional banking is beginning to manifest, and the core of the global financial system is facing a severe test.

The Domino Effect of the Private Credit Crisis

The fuse for this U.S. private credit crisis can be traced back to the beginning of the year. Reports from Barclays ( BCS) and UBS ( UBS) showed that the private credit industry has massive loan exposure to software and technology companies, with such assets accounting for as much as 55% of some portfolios.

With the breakthrough progress in AI technology, the market began to question the long-term viability and cash flow stability of these software companies, leading to a plunge in the prices of related stocks and bonds. The truth about damaged underlying assets quickly triggered investor panic, with redemption requests growing geometrically.

Blue Owl ( OWL ), which manages over $300 billion in assets, bore the brunt and chose to sell $140 million in loans at a price of 99.7 cents to meet redemption demands. However, this move failed to calm the market and instead exposed a severe lack of liquidity in the secondary market.

Just days later, a similar situation occurred at the BCRED private credit fund under Blackstone ( BX ), one of the world's largest asset management firms. Facing immense redemption pressure, its senior partners used $150 million of their own capital to fill the redemption gap in an attempt to avoid restricting redemptions.

But what followed added fuel to the fire. Just hours after Blackstone announced its solution, BlackRock ( BLK) announced that it would write down a $25 million piece of junior debt from par value to zero within three months and impose a 5% redemption limit on its $26 billion HPS corporate loan fund, despite shareholders requesting a redemption rate as high as 9.3%.

If Blue Owl selling loans was the "margin call moment" for private credit, then BlackRock writing down the face value of the loan to zero was the final straw that broke the market's back.

Financial blog Zerohedge pointed out that BlackRock did what Blue Owl and Blackstone desperately wanted to avoid, because they knew full well that doing so would trigger more redemptions and force more selling, creating a vicious cycle of falling stock prices, thereby setting off a full-blown industry-wide panic.

BlackRock's impairment action quickly triggered a chain reaction. Its managed $26 billion HPS corporate loan fund eventually set a 5% cap on buybacks. Subsequently, veteran interval fund manager Cliffwater also faced record redemption requests of 14%, forced to "close the gates" and limit the first-quarter redemption ratio to 7%.

David Rosen of Rubric Capital had previously warned: "I wouldn't be surprised if Cliffwater is the canary in the coal mine and the first domino in the 'bank run' we foresee."

Analysts noted that although private credit firms can avoid a violent collapse by restricting quarterly outflows, the trend of capital outflows is likely to remain high in the coming quarters.

They compared the current situation to the 2022 real estate fund crisis, when a similar slow bleed of capital occurred, lasting for months, and the industry took years to recover.

Allianz Chief Economic Advisor and renowned economist Mohamed El-Erian recently issued a warning that liquidity issues and redemption pressures in the U.S. private credit market are brewing a "classic contagion phenomenon," which could force investors into a dilemma where "they can't sell what they want to sell, so they have to sell what they can sell."

Penetration into the Banking System

Even more concerning is that the turmoil in private credit funds is spreading to other areas of the debt market. Collateralized Loan Obligations (CLOs), as one of the few assets funds can easily sell during times of distress, have recently seen significant declines. According to research from Santander US Capital Markets, high-yield CLO bonds primarily held by private credit funds fell by 4.1% in February, a sharp contrast to the 1% gains in January and December, signaling a clear reversal in market sentiment.

Meanwhile, the private credit industry is also facing pressure from its funding providers—major banks. Some bankers have stated clearly that they expect to tighten credit policies or even gradually withdraw from this space.

According to people familiar with the matter, boards and management of major banks have recently launched a new round of comprehensive reviews targeting private credit risk exposure, covering key indicators such as loan portfolio composition and collateral advance rates.

Although bank executives say there is currently no evidence of systemic issues and that banks are well-prepared for potential stress, JPMorgan has taken the lead. After marking down the valuations of loans made by some private credit funds to software companies, it cut the credit lines provided to those funds.

Data from Moody's Ratings shows that as of the middle of last year, total loans from the U.S. banking industry to non-depository financial institutions, including private credit firms, reached $1.2 trillion, nearly triple the size of a decade ago.

Data from the Federal Deposit Insurance Corporation (FDIC) is even more startling. U.S. bank loans to non-depository financial institutions (NDFIs) reached $1.4 trillion by the end of 2025, with an additional $2.8 trillion in undrawn loan commitments, bringing total potential exposure to $4.2 trillion.

Deutsche Bank disclosed in its annual report that its private credit exposure at amortized cost has risen to 25.9 billion euros (approximately $30 billion), accounting for 5% of its total loans. The bank's loan exposure to the tech industry (including software) also increased to 15.8 billion euros. Deutsche Bank is not an isolated case; the U.S. banking industry as a whole faces significant potential risks.