Banks Are Quietly Cutting Off Private Credit — And Insurance Companies Are Next in the Firing Line

If you’ve been following the slow-motion unraveling of private credit markets, the past two weeks delivered two unmistakable warning signals. First, major banks — not just JPMorgan but now Goldman Sachs and Barclays too — are systematically cutting their exposure to shadow banks through a quiet but powerful mechanism: collateral revaluation. Second, the bond market has started punishing insurance companies for their heavy bets on private credit. Together, these aren’t isolated tremors. They are textbook “Stage Two” behavior in a financial crisis cycle — and they matter far beyond Wall Street.

What Is Private Credit, and Why Should You Care?

Private credit (loans made by non-bank financial firms directly to companies, bypassing public bond markets) exploded in popularity over the last decade. Firms like Blue Owl and Blackstone raised enormous pools of money and lent it to risky corporate borrowers at high interest rates. Investors loved the double-digit returns. Nobody asked too many questions.

But now the questions are arriving all at once.

The Three Stages of a Credit Bust — and Where We Are Now

To understand what’s happening, you need a simple framework. Think of a financial bust in three stages:

• Stage One: People start realizing there’s a bubble. Money begins flowing out in reverse, but banks and other big investors still largely stand behind the troubled assets. Things wobble but stabilize — temporarily.
• Stage Two: More investors pull their money out. Banks grow reluctant to provide emergency funding. Forced asset sales begin, prices drop, fear spreads, and the cycle accelerates.
• Stage Three: Systemic collapse. The entire financial system runs for the exits. Think 2008.

We are now firmly in Stage Two territory. Here’s why.

Signal One: Banks Are Cutting Shadow Banks Off at the Knees

Shadow banks (non-bank financial firms like hedge funds and private credit funds that lend money but don’t take deposits) don’t fund themselves the way your local bank does. They raise money primarily from large institutions — insurance companies, pension funds — but they also borrow from regulated banks like JPMorgan in two specific ways:

1. Back leverage — shadow banks pledge some of the assets in their portfolios to banks as collateral (something pledged as security for a loan) and borrow additional cash against them. This is how a fund earning 8-9% can juice its returns to 12% or more. It’s leverage (using borrowed money to amplify investment returns), and it’s often buried in the fine print.
2. Emergency credit lines — when investors start pulling money out of a fund, the fund manager needs cash fast. Rather than sell assets at fire-sale prices, they draw on pre-arranged credit lines from banks like JPMorgan.

JPMorgan started pulling back on both of these a month ago by reducing the value it assigns to private credit assets pledged as collateral. If the bank decides your collateral is worth less, you can borrow less against it — or you have to swap in different, higher-quality assets. This is collateral revaluation, and it is a deliberate act of distancing.

Now, according to Bloomberg, Goldman Sachs and Barclays have followed. Top executives at these banks are personally involved in raising the interest rates charged for back leverage and tightening collateral terms. Some banks are specifically scrutinizing loans to software companies they think are vulnerable to AI disruption — essentially doing due diligence they skipped during the boom years.

The practical effect: shadow bank hedge funds are losing access to the marginal borrowing that powered their returns, and losing access to the emergency lifelines that would let them avoid selling assets. When forced selling begins in earnest — when funds have no choice but to dump assets into an unwilling market — prices crater, fear spreads, and Stage Two deepens toward Stage Three.

Signal Two: Insurance Companies Are Being Dragged Into the Open

Here’s where the story gets bigger. Shadow banks didn’t fund themselves out of thin air. The bulk of their capital came from large institutional investors — and the largest of those are life insurance companies and annuity providers.

Life insurers have been what analysts call “yield reachers” — meaning they took on progressively riskier investments in search of higher returns because decades of low interest rates left them scrambling to meet the promises they made to policyholders. Private credit, with its attractive yields, was catnip.

What makes this worse is leverage. Insurance companies don’t just invest policyholder premiums. They also use repo (a short-term loan where one party sells an asset and agrees to buy it back later) to amplify their investment capacity. There is more hidden leverage in the insurance sector’s private credit exposure than the industry has ever publicly acknowledged.

In late February, European insurers AXA and Allianz began quietly signaling they were distancing themselves from private credit — essentially calling it toxic. Now the contagion has crossed the Atlantic and moved beyond hushed earnings calls.

The Bond Market’s Verdict

According to the Financial Times, insurance company debt has become one of the worst-performing sectors in the US investment-grade bond universe. Investment-grade bonds (debt issued by financially solid companies, rated safe enough for conservative investors) from life insurers are now yielding roughly one percentage point more than comparable US Treasury bonds. That spread (the extra return investors demand to hold a riskier asset instead of a safe government bond) is the bond market’s way of saying: we’re not sure these companies are as safe as advertised.

This is not a panic — yet. But it is a warning signal that the broader market is taking the “toxic waste” label seriously.

The Industry Strikes Back

The American Council of Life Insurers responded immediately to the Financial Times article with a letter calling the coverage “misleading” and name-dropping the IMF and credit rating agencies as reassurances. They also pointed to state-level insurance regulation as a comfort.

None of this is particularly reassuring. Rating agencies famously missed the subprime mortgage crisis. State regulators are limited in scope. And notably, the US Treasury Department recently told those same state regulators to take a closer look at private credit entanglements with insurance companies — which is not something you do when everything is fine.

The defensive tone of the industry response is itself informative. When institutions protest this loudly and this vaguely, it usually means the questions being asked are exactly the right ones.

Why Insurance Companies Are the Linchpin

Banks provide crucial marginal financing to shadow banks, but insurance companies provide the bulk of the funding. If insurers start cutting off their capital flows to private credit funds — and evidence suggests some already have, quietly — the funds lose their primary source of money. There is no backstop after that.

Insurance companies are also caught in a self-reinforcing bind: the more the bond market punishes their debt, the more pressure they face to clean up their balance sheets. Cleaning up means cutting ties to private credit. Cutting ties means the shadow banks lose funding. The shadow banks then face forced selling. Forced selling produces the price discovery (the process by which asset prices are revealed through actual market transactions) that nobody on the inside wants, confirming fears and accelerating the cycle.

This is precisely the mechanism that transformed a US housing problem into a global monetary crisis in 2008 — not the losses themselves, but the toxic waste dynamic, where anyone adjacent to the troubled assets becomes suspect, and the entire financial system retreats simultaneously.

What This Means for the Eurodollar System

The eurodollar system (the vast, mostly invisible network of US dollar-denominated banking and lending that operates outside the United States and outside the Federal Reserve’s direct control) runs on confidence and collateral. When collateral gets revalued downward — as banks are doing right now — the whole system tightens. Credit becomes scarcer and more expensive. Funding chains shorten. The global economy, which depends on a smoothly functioning eurodollar system for trade finance and cross-border lending, feels the squeeze long before any headline announces a crisis.

Private credit’s troubles are not contained to a few hedge funds. They run directly through the insurance companies that fund American retirements, through the banks that lubricate global dollar flows, and through the collateral chains that hold the entire edifice together. Stage Two is here. Stage Three is not inevitable — but every mile marker passed makes it harder to turn around. US insurers had plunged roughly $700 billion, or 13% of their total bond holdings, into asset-backed and other structured products by end of 2024 (Reuters), underscoring just how deep the exposure runs. Meanwhile, a recent Moody’s report showed US banks had lent nearly $300 billion to private credit providers as of June 2025 — a sign of how tightly the two sectors are now bound (Reuters).

Sources

1. Blue Owl turmoil adds to strain in $2 trillion US private credit sector — Reuters
2. Private credit dives back into FABulous funding — Reuters
3. Original source: Jeff Snider — YouTube