The Bank of Canada’s worried about the rise of private credit. Here’s why

The Bank of Canada is carefully watching the rise of an alternative credit model that has Canadian investors and banks exposed to half a trillion dollars of loans held largely beyond the public eye.

The concern revolves around private credit, which doesn’t have a universal definition but broadly involves businesses taking out loans from non-bank lenders including asset managers, insurers and pension funds.

A mid-sized business might turn to private credit if they’re looking for money to fund the next stage of growth but are still too small for a traditional bank loan or issuing debt on the bond market.

The share of Canadian businesses making use of private credit is still limited, but the rapid adoption of the model worldwide and in the United States it has been tied to high-profile bankruptcies.

Private credit was flagged as a risk in the Bank of Canada’s 2026 financial stability report in May. Economists at the central bank released a paper last week tracking the model’s growth in Canada, and explaining to a broader audience why private credit is worth watching.

Globally, the uptake of private credit is expanding rapidly as firms seek fast and flexible ways to access capital, according to the Bank of Canada.

But the report’s authors said the share of loans from non-banks to domestic businesses has held steady at about 15 per cent over the past decade. They said that suggests “private credit has not been displacing traditional sources of funding.”

The Bank of Canada’s analysis concluded Canadian firms aren’t taking out those loans en masse, but in many cases, they are underwriting them.

As of the start of this year, the bank estimates that there was a combined value of $500 billion in private lending by Canadian investors and lending to private credit funds by Canadian banks. Most of that lending activity was in the United States.

Private lending in Canada primarily comes from life insurers, pension funds and asset managers. Perhaps counter-intuitively, banks themselves are also exposed to private credit by lending to funds who are involved in the space.

The Bank of Canada noted that insurers and pension funds are stable investors in the private credit space. Domestic asset managers are a “small but growing” segment of the market, while banks’ exposures to private lending is considered relatively low-risk.

In its May financial stability report, the Bank of Canada deemed private credit risks “manageable,” but monetary policymakers think it’s still a space worth watching.

Private credit hasn’t been tested in a prolonged market downturn, so it’s unclear what kind of ripple effects the financial system would see from a shock like that.

“These exposures may help diversify portfolios and support returns, but they also create potential channels of contagion,” the Bank of Canada economists wrote last week.