How scrutiny of private-credit valuations will impact banks

The Securities and Exchange Commission and state insurance regulators are increasing scrutiny of private-credit valuations, raising concerns about banks' growing exposure to hard-to-value, illiquid assets. Private-credit loans are individually negotiated, do not trade on secondary markets, and have historically been offered only to accredited investors. SEC Chairman Paul Atkins is seeking to expand access to individual investors. In a joint statement, SEC Chief Accountant Kurt Hohl and Brian Daly, director of the SEC's Division of Investment Management, said the growing accessibility of private assets calls for registrants to "maintain rigor" over how assets are valued and how valuations and risk characteristics are disclosed. The SEC has cautioned firms against boilerplate language or ignoring current market conditions.

Banks' exposure runs largely through life insurers. The Federal Reserve Bank of Chicago estimates insurers have invested about $1 trillion in private credit, while the National Association of Insurance Commissioners (NAIC), a trade group representing state regulators, puts exposure at $1.21 trillion at the end of 2025. Banks' counterparty exposure to insurers comes through credit lines, funding agreement notes, derivatives and syndicated private loans. If an insurer faces a run or regulatory seizure, banks could face collateral haircuts and broader instability. Life insurers are also significant financiers of the AI data center buildout, and experts warn that defaults on AI-linked loans could spread through the financial system. Proposed bank capital changes, including lower risk weights, could further deepen banks' ties to private credit.

Private-equity owners and asset managers have acquired many life insurers and increasingly invested in affiliated businesses, with life insurers holding a combined $321 billion in investments acquired from affiliated entities last year, according to the NAIC. Morningstar DBRS's Nadja Dreff flagged potential conflicts of interest where private-equity owners earn fees from insurers they own, and said her firm is assessing whether parent companies exert "undue influence" over insurers' investment decisions. Mayra Rodriguez Valladares of MRV Associates said state regulators are pressing insurers for greater transparency. Forensic accountant Tom Gober alleged that some carriers hold substantial short-term funding agreements against thin cash reserves and have masked financial health through offshore reinsurance, though these are his claims.

The NAIC is conducting a 2026 year-end review of life-insurer reserve adequacy, linking asset valuation quality to reserve assumptions, and is considering different treatment for operating subsidiaries and hard-to-value private structures. Attorney John Mahon of Cleary Gottlieb noted that robust valuation is essential to expanding retail products, particularly as the SEC's proposal would let registered investment advisers charge performance fees to a broader set of investors, mutual funds and ETFs. Dreff cautioned that the industry has not been tested through a full credit cycle, so how these investments perform remains unknown.