Here’s why the Bank of Canada is worried about the rise of private credit

The Bank of Canada is closely monitoring the growth of private credit, an alternative lending model that has Canadian investors and banks exposed to approximately $500 billion in loans largely outside the public eye. Private credit generally refers to businesses borrowing from non-bank lenders such as asset managers, insurers, and pension funds. While the share of Canadian businesses utilizing private credit remains limited, its rapid worldwide adoption has led to concerns.

The Bank of Canada highlighted private credit as a potential risk in its 2026 financial stability report in May. Economists at the central bank later released a paper detailing the growth of private credit in Canada and explaining why it warrants attention. Globally, the use of private credit is expanding as companies seek faster and more flexible access to capital.

However, despite the increase in private lending, the share of loans from non-banks to domestic businesses in Canada has remained steady at around 15% over the past decade. This suggests that private credit has not significantly replaced traditional funding sources. Of the estimated $500 billion in private lending, most activity is concentrated in the United States, with Canadian investors and banks lending to private credit funds.

Most private lending in Canada comes from life insurers, pension funds, and asset managers, while banks' exposures are considered relatively low-risk. The central bank noted that insurers and pension funds are stable investors in private credit, while domestic asset managers represent a small but growing segment of the market.

The Bank of Canada's analysts warned that private credit is still untested in a prolonged market downturn, which could lead to unforeseen ripple effects on the financial system. They also raised concerns about the lack of transparency and regulatory oversight surrounding private lending, which could create potential channels of contagion if private credit performs poorly abroad.