Federal Reserve Lacks Tools To Control Private Debt Risks

Here’s a breakdown of the Chosun Ilbo interview with Stanford GSB Professor Amit Seru, published today.

The Core Argument

Seru’s central thesis is structural: the Fed’s toolkit was built for banks, but the risk has migrated outside the banking perimeter. The private debt market has grown to roughly $2.15 trillion globally (IMF estimate) — quadruple its size a decade ago — and the Fed has no direct lever to address distress within it. If stress emerges, the Fed can supply liquidity to core funding markets and shield banks exposed to private credit, but as Seru puts it, “the Fed lacks the institutional and political means to address the difficult task of restructuring troubled loans.”

Key Risk Vectors Seru Identifies

Liquidity mismatch — Some private credit funds allow shorter redemption cycles against long-duration, illiquid loan portfolios. A shock triggering simultaneous redemption demands could force fire sales, which would spill into banks and insurers that have invested in those funds.

Valuation contagion — Because private loans lack a secondary market, there is no price discovery. A reassessment of valuations in one fund can propagate across multiple illiquid portfolios simultaneously, with systemic risk spreading “through the complex interconnections within the private debt market rather than the funds themselves.”

AI/tech sector exposure — Private credit funds have been expanding into software companies. If AI disrupts borrower business models and compresses cash flows, loans underwritten in a different macroeconomic and technological environment will be exposed. Seru treats the sector-specific bankruptcies of companies like FirstBrand (auto parts) and Tricolor (used cars) as signals, not anomalies — early stress indicators of how high-debt borrowers respond to rising rates and tightened conditions.

Spillover to non-bank institutions — Insurance companies and pension funds face capital call risk from private credit funds precisely when their own liquidity is stressed (e.g., catastrophic claims surges for P&C insurers).

Why This Isn’t 2008

Seru is careful to distinguish the current situation from the 2008 crisis. Private debt funds carry much higher capital ratios than banks, are funded by investors rather than depositors, and lack the short-term withdrawable funding that made subprime CDOs so dangerous. Losses are more likely to be absorbed at the fund investor level before spreading system-wide. The Fed’s own 2025 stress tests reached a similar conclusion — NBFI exposures did not threaten bank capital under severe scenarios — and Powell as recently as late March 2026 said he sees no contagion risk.

The Regulatory Gap

Seru’s prescription is not to bank-ify private credit regulation. Because these funds are funded by investors rather than depositors, securities regulation — not bank capital and liquidity rules — is the appropriate framework. His focus is on transparency: better disclosures on borrower valuations, debt ratios, and liquidity conditions, particularly as the investor base expands to include retail participants who are more prone to panic.

This squares with the broader pattern visible in recent regulatory action. The OCC and FDIC rescinded leveraged lending guidance in late 2025, explicitly acknowledging that overly restrictive bank rules had pushed leveraged lending outside the regulatory perimeter into nonbanks — and the Fed notably declined to join that rescission.

The Warsh Dimension

Seru’s interview was framed around the incoming Kevin Warsh Fed chairmanship (Powell’s term expires May 2026, though Warsh’s Senate confirmation remains delayed due to Senator Tillis’s hold). Warsh’s stated philosophy — shrinking the Fed’s balance sheet, reducing “mission creep,” and returning to core monetary stability mandates — would seem to cut against any expansion of Fed authority into private credit oversight. That makes the institutional gap Seru identifies more durable, not less.