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, a non-traditional lending model that has left Canadian businesses and financial institutions exposed to a significant amount of loans not readily visible to the public. Private credit involves entities such as asset managers, insurers, and pension funds providing loans to businesses, often serving as an alternative to traditional bank loans for mid-sized companies seeking growth capital.

While the share of Canadian businesses utilizing private credit remains limited, its rapid worldwide adoption has been linked to high-profile bankruptcies. The Bank of Canada highlighted private credit as a potential risk in its 2026 financial stability report.

Economists at the central bank have recently published a paper detailing the growth of private credit in Canada, emphasizing the need for greater attention to this emerging financial model. Globally, private credit is expanding rapidly, driven by businesses' desire for fast and flexible access to capital. However, the Bank of Canada's analysis suggests that the share of loans from non-banks to domestic businesses has remained steady at around 15% over the past decade, indicating that private credit has not replaced traditional funding sources for Canadian firms.

As of the beginning of this year, the bank estimates that Canadian investors and banks collectively held $500 billion in private lending, with most of this activity concentrated in the United States. Domestic lending primarily comes from life insurers, pension funds, and asset managers. Interestingly, banks themselves are also exposed to private credit through their lending to funds operating in this space.

The Bank of Canada has noted that insurers and pension funds are stable investors in the private credit sector, while banks' exposures to this area are considered relatively low-risk.

Despite the Bank of Canada's assessment that private credit risks are currently "manageable," policymakers are still keen to monitor the situation. The lack of oversight and limited transparency in private credit transactions raise concerns about the potential for contagion in the event of a market downturn. Private credit often carries higher interest rates than traditional loans, but businesses appreciate the speed and flexibility offered by non-bank lenders.

However, the opaque nature of private credit transactions, often negotiated behind closed doors, adds another layer of risk.

Some economists attribute the recent surge in private credit to the aftermath of the 2008-09 financial crisis, when banks pulled back from lending to small and medium-sized businesses. In response, private lenders stepped in to fill the gap, offering more flexible terms and faster access to capital. However, the Bank of Canada's analysts caution that the growth in private credit is largely happening outside a regulatory environment, posing a greater risk for investors and Canada's financial stability.