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Private credit crunch? NBFIs and why the financial crisis does not apply

Non banking financial institution (NBFI) lending is creating further headaches for the financial industry when managing private credit.
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By Will Davis , 

Banks Sector Leader

15/07/2026

Having now surpassed 51% of all global assets, non‑banking financial institution (NBFI) lending is creating further headaches for the financial industry when managing private credit.

What is private credit?

Otherwise labelled as “shadow banking,” this involves non‑banking entities providing banking‑like services such as lending, asset management, and risk pooling without holding a full banking licence or accepting deposits. While banks have paid the price in the past for inadequate risk assessment and credit checks when lending, the private credit market continues to grow without the same regulatory framework and supply chain risk comprehension.

The private credit market comprises direct lending by private debt funds, mezzanine loans, unitranche facilities, sponsor‑backed leveraged loans, and privately placed debt to corporates and infrastructure projects. Key participants include private credit funds, asset managers, insurance companies, and other NBFIs, alongside finance providers such as business development companies and specialty lenders. Structures typically involve bespoke documentation (limited covenants), longer tenor, reduced secondary liquidity, and higher yields to compensate investors for illiquidity and complexity. Collateral and recovery dynamics differ from those of syndicated bank loans, and exposures are often concentrated at single sponsors, sectors, or supply-chain nodes — making credit assessment and operational due diligence critical. That combination of bespoke structures, limited public transparency, and concentrated exposures increases valuation, operational, and contagion risk compared with standard bank lending.

Basel 3.1 — what matters for private credit exposures

As banks prepare for the implementation of Basel 3.1 in the UK from 1 January 2027, they must revisit the Fundamental Review of the Trading Book (FRTB) and align their internal rating and risk-weighted assets (RWA) processes with the stricter model, calculation, and disclosure requirements. The package will materially affect private credit exposures by raising capital needs where internal models previously produced low RWAs (the output floor), and by tightening the standardised credit risk approach so that unrated or manager‑assessed private market positions attract higher risk weights. Revised treatments for equity and fund investments make holding or warehousing stakes in private equity and private credit funds more capital‑intensive, reducing banks’ appetite to sponsor or retain such positions.

FRTB changes and tougher credit valuation adjustment (CVA)/counterparty rules further penalise illiquid or hard‑to‑price credit instruments. At the same time, the emphasis on operational risk, data governance, and vendor due diligence obliges banks to strengthen valuation, monitoring, and third‑party controls. Finally, expanded disclosure and stress‑testing expectations will force clearer reporting of concentrations and model assumptions for exposures to private funds, sponsor‑backed corporates, and other NBFIs, increasing board‑level scrutiny and governance demands.

Implications for governance, D&O, and PI risk

If directors and officers were not already concerned with supply chain risk, then private credit will only further apply greater scrutiny to governance as banks assess the creditworthiness of their supply chain, as highlighted last year in our article, Private credit: The gateway to the future of credit markets. Marsh’s recent 2025 Financial institution claims report highlights D&O claims from last year rose to 33% of all bank client notifications. As regulatory violations (22%) and governance failures (18%) continue to be the main contributors to D&O notifications, policyholders should also be mindful of the continued dominance of regulatory breaches and improper business practice notifications, which also lead the way in professional indemnity (PI) notifications.

Banks’ heightened capital charges, tighter disclosure requirements, and the need for stronger data and vendor controls under Basel 3.1 all translate into greater expectations for boards, risk committees, and senior management. Increased capital costs may alter lending appetite and push more lending into NBFIs, which in turn intensifies concentration and reputational risks. Directors therefore face potential claim drivers from failures in oversight (for example, inadequate due diligence on fund managers or sponsors), incorrect or incomplete disclosures, breaches of prudential requirements, and deficiencies in third‑party risk management.

Scenario planning, modelling, and insurance mapping

Today, the Financial Stability Board (FSB) estimates that UK banks have £173 billion of banking‑book exposures to private market funds and highly leveraged corporates backed by financial sponsors. Such exposure, amplified by emerging technological developments such as artificial intelligence and stricter Basel 3.1 requirements, creates the need for banks to reassess both financial and non-financial risks when loss scenario planning, modelling, and insurance mapping, to future-proof their risk functions as the year unfolds.

Practical next steps for banks and directors:

  • Begin by re‑baselining RWAs and capital plans: revisit internal models and run sensitivity testing against the Basel output floor and revised standardised approaches to understand potential capital uplifts from private credit.
  • At the same time, strengthen legal, credit, and operational due diligence and valuation governance for private credit counterparties and increase contractual transparency (covenants, reporting cadence) where market pricing is limited.
  • Identify concentration and sponsor‑level hotspots and stress‑test contagion scenarios.
  • Elevate board reporting to include private credit risk indicators and third‑party manager performance.
  • Review D&O and PI coverage specifically for gaps arising from regulatory or governance failures.
  • Finally, align insurance placements with projected capital impacts — mapping D&O and PI limits to forecast RWA and liquidity shifts so residual financial and reputational risk is appropriately managed.

The combination of a growing private credit market, significant exposure to NBFIs and the capital, modelling, and disclosure changes introduced by Basel 3.1 will reshape banks’ approaches to lending, risk management, and governance. For directors and risk owners, the challenge is twofold: to make lending and investment decisions resilient to higher capital charges and to shore up governance around supply chains, data, and operational controls so that regulatory scrutiny and potential claims are anticipated and mitigated.

Marsh is best positioned to assist you with reviewing your insurance programmes and requirements. Please get in touch with Will Davis to answer your questions and discuss further.

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