Private credit's $1.7 trillion moment: regulators want stress tests, lenders want time

WASHINGTON — Private credit is no longer a cottage industry with good lawyers. At an estimated $1.7 trillion in the United States, it is a parallel banking system that funds software roll-ups, healthcare practices, and the sort of mid-market company that used to live on a regional bank's book. Regulators have noticed. They want stress tests, or something that looks enough like stress tests to put in a speech.

The industry's objection is partly philosophical and partly practical. These vehicles are not deposit-taking banks. Their investors are pensions and insurers that signed up for illiquidity. Forcing bank-like liquidity assumptions onto locked-up capital, managers argue, would raise the cost of credit for exactly the borrowers banks have already stepped away from.

The official sector's counter is simpler: size plus opacity plus leverage, even if the leverage sits one entity over, is how the last few crises were dressed when they arrived. They are not asking for a replica of CCAR on day one. They are asking for the right to see the same loan sitting in three different funds without playing detective.

For corporate borrowers, the near-term effect of a heavier hand would be slower origination and slightly wider spreads — a nuisance, not a freeze. The longer-term effect is political. If private credit wants to remain the spare tire of American finance, it will have to accept that spare tires get inspected after they become the wheels.