- AI companies now account for more than a third of private credit deals.
- Financial regulators warn a sharp AI correction could trigger major losses.
- Banks are becoming increasingly exposed to the opaque private credit market.
The artificial intelligence boom has created a new kind of gold rush across global finance. Billions are flowing into AI companies, data centres and chip infrastructure at extraordinary speed, with lenders and investors scrambling to secure a place in what many believe could become the next defining technological revolution.
But behind the excitement, regulators are beginning to ask a more uncomfortable question: what happens if the AI frenzy slows down?
A fresh warning from the Financial Stability Board suggests the risks may be building faster than many expected. The watchdog, which monitors financial systems across major economies, said the growing dependence on private credit to fund AI expansion could eventually backfire if valuations collapse or projects fail to deliver expected returns.
At the centre of the concern is the rapid rise of the private credit industry, a loosely regulated world where investment firms lend money directly to companies outside the traditional banking system. These lenders have increasingly become one of the main financial engines behind the AI boom.
The hidden debt behind the AI race
Most people see artificial intelligence through products such as chatbots, AI search tools or image generators. What is less visible is the enormous amount of money needed to power the industry behind the scenes.
AI infrastructure is expensive, datacentres cost billions to build, advanced chips require huge capital investment and electricity demand is rising sharply as companies race to expand computing capacity. Much of this growth is now being financed through borrowing.
According to the FSB, AI-related companies accounted for more than a third of all private credit deals in 2025, compared with 17 per cent over the previous five years. That shift has made technology one of the biggest borrowers in the private credit market alongside healthcare and services.
The watchdog warned that this concentration creates risks if the sector suddenly weakens. A sharp fall in AI company valuations could lead to “sizeable” losses for investors and lenders, particularly if datacentre projects face delays, electricity shortages or lower-than-expected demand.
There are already concerns that the pace of AI infrastructure construction may eventually outstrip real demand, leaving investors exposed to oversupply and weaker returns.
The bigger issue for regulators is visibility. Unlike traditional banks, private credit firms operate in a far more opaque environment. Lenders often have limited information about borrowers, while risks can spread quietly across multiple firms and institutions.
Why regulators fear another cycle of hype
The anxiety surrounding AI is not necessarily about the technology itself. Regulators are not arguing that AI lacks value or transformative potential. The concern is more familiar: too much money may be chasing the next big thing too quickly.
The pattern resembles earlier investment booms where excitement outpaced financial reality. The dotcom bubble, the crypto surge and the years leading up to the 2008 financial crisis all followed similar dynamics. New technologies attracted intense optimism, valuations soared, borrowing accelerated and eventually markets struggled to justify expectations.
The current AI race carries some of those same signals. Investors fear missing out on what could become the next dominant industry. Companies are rushing to announce AI projects, lenders are competing aggressively to finance expansion and as long as valuations keep climbing, risk-taking becomes easier to justify.
At the same time, cracks are already emerging in parts of the private credit market. Several funds have faced heavy withdrawal requests this year as investors tried to pull money amid concerns over loan quality and borrower vulnerability to AI disruption.
Reports suggest wealthy investors sought to withdraw roughly £15bn ($20bn) from private credit funds this year, though many were only able to access about half of their requested money after firms imposed withdrawal limits.
The FSB also pointed to recent failures involving private credit-backed US automotive companies Tricolor and First Brands. Both later faced fraud allegations, raising wider concerns over whether some lenders may have become too willing to fund risky businesses during periods of aggressive expansion.
Traditional banks are no longer distant observers either. Many are now deeply connected to private credit through partnerships, financing arrangements and overlapping borrowers. Losses linked to failed private credit deals have already affected banks including JP Morgan, Barclays, UBS and Jefferies.
That growing interconnectedness is exactly what regulators fear most. If AI investment suddenly cools or debt-funded projects fail at scale, the effects may not remain confined to tech firms or niche lenders.
For ordinary people, the exposure could spread quietly through pension funds, stock markets, banks and investment portfolios long before the risks become obvious.
None of this means an AI crash is inevitable. Supporters argue the technology is genuinely transformative and that periods of heavy investment are natural during major industrial shifts.
Still, regulators appear increasingly concerned that the financial system may once again be drifting into familiar territory, where hype, borrowing and fear of missing out begin moving faster than fundamentals.
