THE PRIVATE CREDIT PARALLAX: When Central Bankers Say "Alarm Bells," They Mean It
On Tuesday, Andrew Bailey stood before Parliament and told lawmakers that "alarm bells" were ringing in a market now valued at $1.7 trillion.
This matters not because Bailey is an alarmist. He isn't. The Bank of England governor has been methodical, measured, and occasionally glacial in his assessments of financial fragility since 2020. When he uses the phrase "alarm bells," it carries historical weight. It means he's dusting off the playbook from the last catastrophe and finding it uncomfortably relevant.
The collapsing dominoes—First Brands (auto parts) and Tricolor (subprime auto lending)—are ostensibly contained incidents. Until they're not.
The Structural Parallels Are Genuinely Eerie
Deputy Bank governor Sarah Breeden laid it out with forensic precision: "We can see the vulnerabilities here, the opacity, the leverage, the weak underwriting standards, the interconnections". She added: "We can see parallels with the global financial crisis. What we don't know is how macro-significant those issues are."
Translation: we know the structure is rotten. We don't know the size of the hole in the floor.
This is the core problem with private credit. For those still operating under the assumption that 2008 was a one-time regime shock, remember what happened: financial architecture that existed for decades suddenly revealed itself to be a house of cards. Not because the fundamentals changed overnight, but because nobody—literally nobody, not the Federal Reserve, not the rating agencies, not the banks themselves—had mapped the system's true interconnectedness.
Private credit markets operate outside the regulatory perimeter. Bailey drew direct comparison to the 2008 environment, saying people kept insisting "it's too small to be systemic, it's idiosyncratic". He called it "the wrong call" in retrospect.
The question circling now is whether we're making the same error in real time.
The Opacity Isn't a Bug, It's a Feature
Here's what separates private credit from traditional lending: transparency is structurally impossible. A bank that lends money to a corporation produces paper trails, regulatory filings, credit rating adjustments. Private credit funds? They layer debt through structures, tranches, securitizations, and complex instruments designed specifically to obscure the true risk profile.
First Brands and Tricolor "relied heavily on complex and hidden loans from private finance firms," according to the financial press. Jefferies, the investment bank that had lending exposure to First Brands, is now accusing the company of fraud after the collapse. The CEO of Jefferies is publicly railing against counterparties and advisers, warning of weakened underwriting. Let that sink in: a sophisticated financial institution got caught flat-footed by a borrower's collapse.
If a major bank can be blindsided by the solvency of a borrower they're lending to, what does that tell us about the due diligence occurring across the private credit ecosystem?
It tells us that leverage + opacity + interconnected financial institutions = the recipe we've already tested once, at catastrophic cost.
The Volume Problem Dwarfs the Visibility Problem
The $1.7 trillion figure is not a scare headline. It's a baseline. Private credit has grown explosively since the 2008 crisis precisely because banks became heavily regulated and risk-averse. Pension funds, insurance companies, family offices, and institutional investors needed yield. Private credit obliged, offering 7-10% returns in a world where the 10-year Treasury was offering 3-4%.
The velocity of lending has been staggering. Private credit firms have been "too active at lending at high interest rates," raising systemic concerns about further collapses. In other words: lenders threw money at problem borrowers because the fees were too good to resist and the risk was socialized across a thousand different counterparties.
This is how systemic risk forms. Not from a single bad actor, but from distributed failures across hundreds of entities, each believing their exposure is immaterial.
Jamie Dimon's Cockroach Principle Isn't Reassuring
Last week, JPMorgan Chase chief Jamie Dimon gave what might be the most honest warning you'll hear from a major bank CEO: "when you see one cockroach, there are probably more... Everyone should be forewarned on this."
Dimon doesn't issue casual warnings. He's a financial institutionalist and an establishment figure who typically downplays systemic risks in public. When he's cautioning the market about hidden failures, it means the signals are obvious to anyone paying attention.
The question is: how many cockroaches have already been crushed, and how many are still skittering through the walls?
The Regulatory Response Is 9-12 Months Too Late
The Bank of England is planning a "system-wide exploratory scenario" on the broad private credit market, using a similar model to last year's review of risks to core UK financial markets. Stress tests. Scenario planning. Analysis. All scheduled to complete in "nine to 12 months."
In market time, that's a geological epoch.
If First Brands and Tricolor are indeed canaries in the coalmine—if there's real systemic weakness baked into private credit lending at this scale—a nine-to-12-month study is not a pre-emptive action. It's an admission that regulators have no real-time visibility into the risk. They're going to map it retrospectively, after the damage is visible.
This is not a criticism of Bailey or Breeden, who are clearly taking the issue seriously. It's an indictment of the structural limitations of modern financial oversight. Private markets exist precisely to avoid oversight. Now that oversight is playing catch-up with a moving target.
Why This Moment Feels Different From Last Week
Tuesday's equity rally was driven by earnings resilience and the theory that regional banks are "fine." The credit stress that might have sent markets into a tailspin 18 months ago barely registered.
But underneath the surface, something shifted. Central bankers publicly declared that a $1.7 trillion market segment has structural similarities to the pre-2008 environment. That's not noise. That's a formal acknowledgment of systemic vulnerability.
The positive interpretation: regulators are being appropriately cautious and transparent about emerging risks.
The darker interpretation: we're about 12-18 months into a cycle where loans made with aggressive underwriting standards are beginning to default, and the full cascade of interconnected losses hasn't manifested yet. The private credit boom began ramping up aggressively around 2019-2020. Default cycles on cyclical corporate lending typically take 3-5 years to fully materialize. The math suggests we're roughly in the middle.
The Paradox Nobody Talks About
Here's the bind: if regulators clamp down hard on private credit, they force a disorderly unwind of leverage that crashes asset prices and potentially triggers exactly the systemic event they're trying to prevent. If they do nothing, they risk letting the problem compound until it's unmanageable.
The Federal Reserve and Bank of England essentially have to manage a controlled demolition of overleveraged corporate lending, simultaneously maintaining confidence in financial institutions and preventing a liquidity crisis.
It's a macro policy problem dressed up as a micro regulatory problem. And both central banks appear to be aware of it.
The Timing Is No Accident
Notice when this happened: stocks at all-time highs, earnings reports beating expectations, gold crashed, the dollar strengthened, and confidence in the system was peaking. The moment confidence was at its zenith, central bankers walked to the microphone and said, "Actually, we see major risks that look like 2008."
This is deliberate. It's a shot across the bow. A signal to the market: we're watching, we're taking this seriously, we're prepared to act. Whether or not First Brands and Tricolor represent a broader wave of failures, the signal matters because it sets expectations for how central banks will behave if things deteriorate.
The private credit bomb hasn't detonated. But the central banks have now formally acknowledged it exists and is ticking.