How scrutiny of private-credit valuations will impact banks

Bloomberg News

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• Key insight: The SEC and state insurance regulators are trying to ensure that the valuations of opaque, illiquid private-credit loans are accurate. Changes in how those investments are valued could have knock-on effects for banks. 
• What's at stake: The links between private credit, life-insurance companies and banks could contribute to systemic instability, experts warn.

Private-credit valuations are coming under increased scrutiny from federal and state regulators, setting off alarm bells about banks' growing exposure to hard-to-value, illiquid private assets.

Private-credit assets typically are illiquid, individually negotiated loans that don't trade on any secondary market. Because the assets cannot be priced, they have historically been offered only to accredited investors. 

But Securities and Exchange Commission Chairman Paul Atkins is seeking to expand access to individual investors. Last month, the SEC put asset managers on notice to "maintain vigor" around valuations. The reminder came on the heels of explosive growth in private credit.  Specifically within registered funds, private credit surged to $270 billion in 2025, a 60% jump from $170 billion in 2020, the SEC said.

"The growing accessibility of private assets, including private credit, calls for a critical reminder that registrants maintain rigor over how these assets are valued and how those valuations and asset risk characteristics are disclosed to investors," SEC Chief Accountant Kurt Hohl wrote in a joint statement with Brian Daly, director of the SEC's division of investment management. 

Some of the banking industry's exposure to private credit is through life insurers. Life insurers an estimated $1 trillion invested in private credit, according to the Federal Reserve Bank of Chicago. The National Association of Insurance Commissioners, a trade group representing state regulators, pegged insurers' exposure at $1.21 trillion as of the end of 2025. Banks have significant counterparty exposure to life insurers.

Life-insurance companies are among the major firms financing the AI data center buildout, with significant exposure to AI-linked debt. If AI-linked loans default or lose value, losses could spread through the financial system, increasing the risk of contagion to banks, some experts warn. 

Historically, life insurers have relied on safe assets like Treasuries and high-grade corporate bonds to meet future policyholder obligations. But private-equity firms have taken over numerous life insurers, and they sought higher returns in low interest-rate environments by investing heavily in private credit and loans to affiliated companies. 

What's more, banks' ties to the private-credit market could deepen as a result of several proposed changes to bank capital rules. Lower risk weights could make it more attractive for banks to finance or hold certain private credit-related assets.

The shift toward illiquid, but potentially higher-yielding private loans has sparked ramped-up scrutiny. 

"It's important to understand how important valuation is to the SEC," said John Mahon, a partner at the law firm Cleary Gottlieb. "Investors have to have confidence in the valuation process because you need robust valuation in order to get comfortable with the expansion of retail products." 

Nadja Dreff, senior vice president and sector lead for global insurance and pension ratings at Morningstar DBRS, said not every insurer is suited to holding illiquid, opaque investments. 

"We haven't gone through a full credit cycle so we don't know how these investments will perform," Dreff said. "The complexity also varies. There are structures that are quite complex and not easily understood." 

Importantly, the SEC's statement is part of a proposal that would allow registered investment advisers to charge performance fees to a broader range of investors, mutual funds and exchange traded funds, in the push to expand individual investors' access to private markets. 

Whenever there are performance-based fees involved, Mahon said, "you have to have confidence in valuations because now the fund managers are being paid even more concretely on those valuations."

Dreff said there is a potential conflict of interest when private-equity owners receive fees from insurers they own. Morningstar DBRS analysts are assessing whether asset managers' parent companies have "undue influence," and whether insurance companies are making independent investment decisions, she said.

"There could be a mismatch in the relationship where the asset manager or private-equity owner also receives fees from the insurer that it owns," Dreff said. "The more investments that the private-equity owner could offer up and provide, that the insurer accepts as appropriate and buys into their portfolio, the higher the fees that the parent or the private-equity owner earns."

Banks' exposure to private credit

Banks' counterparty exposure to life insurers comes through credit lines, funding agreement notes, derivative contracts and syndicated private loans, experts said. If an insurer experiences a run or regulatory seizure, banks could face collateral haircuts and broader systemic instability, experts said.

Though statutory accounting rules require very high reserves for certain products like term life insurance and universal life insurance, many insurers routinely cede liabilities and transfer a portion of their risk to reinsurers, which reduces the amount of statutory reserves they are required to hold on their balance sheets.

Mayra Rodriguez Valladares, a risk consultant and managing principal at MRV Associates, said state regulators are also pushing insurance companies to be more forthcoming about their risk exposures. 

"Private-equity firms are sitting on a lot of assets that they haven't been able to sell," said Valladares, who trains bankers and regulators about risks they are exposed to. "State regulators are looking under the hood of these life-insurance companies. It's very opaque to the people to whom it should be transparent." 

Tom Gober, a forensic accounting and expert witness, claims that major insurance carriers are holding tens of billions in short-term funding agreements while carrying razor-thin cash reserves meant to cover policyholders' future payouts. He has alleged that some insurance companies have been masking their true financial health through offshore reinsurance and affiliated investments.

"Everyone is starting to talk about how this is not the insurance industry we used to know," said Gober. "It's a high-risk, dangerous, illiquid industry."

A core reason for the higher risk is that private-equity firms and asset managers have bought life insurers and increasingly have invested in affiliated businesses. Last year, there were 139 life insurers with a combined $321 billion of affiliated investment assets, according to the National Association of Insurance Commissioners.

The NAIC, which creates model laws and accounting rules, has developed several proposals aimed at getting a grasp of life insurers' valuations of private credit — in part because current reporting requirements vary substantially.

The NAIC is conducting a 2026 year-end review to address the adequacy of life-insurer reserves, also with a focus on valuations. The review seeks to connect the quality of asset valuations to the assumptions used to demonstrate that adequate reserves have been set aside for policyholders.

In 2025, life insurers' exposure to private-credit funds, privately rated bonds and business development companies totaled $544 billion, the NAIC has found. 

A key issue cited by both the SEC and the NAIC involves so-called Level 3 assets, whose fair value cannot be determined by market pricing and is based on what the industry calls "unobservable inputs." The NAIC also is considering whether operating subsidiaries and difficult-to-value private structures need different treatment.

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Dreff said Morningstar DBRS analysts currently are assessing the quality of individual insurers' risk-management frameworks and overall governance.

"Once we get comfort around that, it gives us an added sort of confidence that an insurer has the appropriate structures and guardrails in place to protect policyholders," she said. 

As for the SEC, it has said the need for accurate valuations applies to all private funds. The agency has cautioned firms against using boilerplate language or ignoring current market conditions when evaluating assets.

"The whole system is stable only if insurance companies have illiquid liabilities to match their illiquid private-credit investments," said Dreff.