The Federal Reserve’s latest private‑credit accounts reveal that U.S. banks were owed $349 billion by private‑credit funds at the close of 2025. The figure combines $181 billion owed by business development companies (BDCs), $150 billion from private‑debt funds and $18 billion from interval and tender‑offer funds. While these funds can count accrued interest as income without receiving cash, their banking partners still expect cash repayments, creating a hidden liquidity mismatch.

Payment‑in‑Kind Interest Gains Traction

Payment‑in‑kind (PIK) interest, which lets borrowers add accrued interest to the principal balance instead of paying cash, has risen sharply among BDC loans. Boston Fed research shows the share of loans using PIK climbed from roughly 6% in 2022 to about 10% by early 2026, with construction loans seeing the steepest jump—from under 5% to nearly 20% in the same period. The increase spans most industries, indicating a broader shift toward cash‑flow flexibility for borrowers.

Bank Exposure and Pricing Dynamics

Banks retain priority claims and collateral on these loans, which can protect them from direct losses if a borrower defaults. However, the Fed’s analysis notes that banks charged BDCs a premium during periods of monetary tightening, even though BDC loans generally enjoy seniority and collateral. Five banks supplied roughly two‑thirds of the drawn bank credit to BDCs between 2012 and 2023, and the premium pricing suggests tighter funding conditions are being passed on to private‑credit borrowers.

Implications for Liquidity and Future Lending

The growing reliance on PIK interest means private‑credit funds may have less cash on hand to meet their own bank obligations, forcing them to draw more on revolving lines or tap reserves. If loan valuations decline or collateral eligibility changes, banks can demand additional security or repayment, potentially prompting funds to sell assets or curtail new lending. Such dynamics could tighten credit availability for U.S. businesses that depend on private‑credit financing.

What to Watch Next

Analysts will monitor the Federal Reserve’s upcoming quarterly private‑credit report for any changes in the $349 billion exposure figure and the proportion of PIK‑linked loans. Attention will also focus on whether banks tighten credit terms for BDCs and other private‑credit vehicles, and how borrowers adjust their financing strategies in response to higher funding costs and potential liquidity constraints.