The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, May 13 (Reuters Breakingviews) - Regulators are casting light on Wall Street’s ties to the murky world of private credit. Banks in turn are trying to narrow the aperture. The Federal Deposit Insurance Corporation will soon publish a review totting up loans and commitments to unregulated business lenders. Judging by individual filings, the six largest U.S. banks increased their exposure by 20% to $360 billion in the first quarter. But JPMorgan JPM.N and others argue the FDIC’s private credit category is too broad, preferring their own, narrower definitions. Conflicting analyses may muddle investors’ risk gauges.

The question of whether ructions in private credit could flow up to banks is growing more pressing. Buyout giant KKR’s KKR.N listed, co-managed private credit fund FS KKR reported a $560 million first-quarter loss on Monday, amid a wave of write-downs and rising uncertainty among its peers. These direct lenders enjoyed brisk business in the years after the 2008 financial crisis, when new regulations restrained banks from backing mid-sized firms and highly leveraged buyouts. But to fuel their growth and boost returns, they turned to fund-level financing — often called back leverage — from traditional lenders. A recent $400 million loss for HSBC resulted from exposure to a unit of private-markets giant Apollo Global Management APO.N, in turn stung by its financing of now-toppled UK firm Market Financial Solutions, Reuters reported.

Regulators and banks are scrambling to offer more details. The issue is that Wall Street’s preferred methods are inconsistent save for one commonality: they produce less alarming figures. JPMorgan says it has “about $50 billion” in commitments and loans outstanding to private credit, a third less than the $76 billion it has under the FDIC's definition. Part of the divergence is down to subscription lines, or loans against investors’ promised infusions into private funds. Uncle Sam characterizes this as private credit. JPMorgan disagrees, since the loans are backed by investors’ guarantees, not the cashflow of any individual business.

Discrepancies are even wider elsewhere. The FDIC puts Wells Fargo’s WFC.N loans outstanding at $72 billion. The bank’s own tally: $36 billion. Arcane methodological differences across firms include collateralized loan obligations, which package up junk loans and sell off bonds against the whole pile. Ratings agencies frequently award the most well-protected of those notes a gold-plated AAA rank. Fitch Ratings points out that some banks may be excluding this exposure.

Even at $360 billion, any losses should be manageable for the nation's biggest banks, which have a combined $1.3 trillion in shareholder equity. Nonetheless, the risk is that this growing exposure becomes harder to track. It’s harder to raise the alarm if the danger is unclear.

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CONTEXT NEWS

Regulations that came into effect in 2025 now require regulated U.S. banks to disclose lending to non-depository financial firms by category, including business credit providers, mortgage lenders, consumer finance companies and private credit firms. The latest round of these call reports was due on May 5.