December 17, 2025
Adding alts to your 401(k) mitigates risk, reduces volatility, and makes it more resilient
All Industry Research
2025 Federal Reserve stress test: Private credit and hedge funds are not a systemic risk
The Federal Reserve found the banking system to be resilient and well-capitalized in the event of a severe economic downturn.
The Federal Reserve’s 2025 stress tests and exploratory analysis found that exposures to nonbank financial intermediaries (NBFIs), including private credit, and to hedge funds were not a systemic risk to U.S. banks.
Private credit refers to non-bank lending to businesses; see our definition of private credit for scope and examples.
Key findings from the Federal Reserve:
Loss rates from NBFI exposures (i.e., the percentage of loans that are uncollectible) were estimated at 7%, under a severe recession in scenario one.
The Federal Reserve concluded that NBFIs do not pose substantial credit risk to the banking system.
Hedge funds accounted for $8 billion in bank losses compared with $17 billion in losses from banks’ own trading desks in scenario two.
Global systemically important banks’ (GSIBs) total losses peaked at $33.3 billion in scenario two, but banks maintained minimum capital levels above regulatory requirements
“2025 Federal Reserve Stress Test Results,” Federal Reserve, 2025.
“Dodd-Frank Act Stress Test 2024,” Federal Reserve, 2025
The June 2025 Federal Reserve stress tests confirm that private credit and hedge funds do not pose a systemic risk to the financial system. The Fed found that funds could endure crippling losses or even fail without threatening the biggest and most complex banks.
In addition to their system-wide stress test, the Federal Reserve’s test included two new scenarios:
2025 Federal Reserve stress-tested scenarios
Scenario 1
Adverse liquidity and credit shocks to private credit and other non-bank financial intermediaries (NBFIs).
Scenario 2
The failure of five large hedge funds, accompanied by a severe economic downturn and high inflation.
The Federal Reserve found, in both cases, the banking system to be resilient and well-capitalized to absorb losses.
Scenario 1:
Banks can manage losses from NBFI exposures
The Federal Reserve found that the banking system can withstand losses from credit and liquidity shocks to private credit and other NBFIs without jeopardizing financial stability. Banks’ capital ratios remained well above the minimum requirements under the Federal Reserve scenario.
The test assumed a severe global recession that causes sharp declines in the credit quality of NBFI loan portfolios and full drawdowns on bank credit lines. The assumptions captured both credit and liquidity risks.
Even in this worst-case scenario, total bank equity capital fell by only 1.6 percentage points to a minimum of 11.8%. Total losses were projected to be about $490 billion over nine quarters. Consequently, banks’ projected loss rates – that is, the percentage of loan exposures expected to be lost due to the NBFI stress – rose to 7%.
Scenario 2:
Stress test showed limited impact from hedge funds
The Federal Reserve concluded that hedge funds do not pose a substantial risk to the banking system. Banks maintain sufficient capital to absorb losses, even under an extreme scenario involving the failure of five large hedge fund counterparties.
In this scenario, global market dislocation, spurred by higher inflation and weaker growth, triggered the hedge fund distress. As a result, the five hedge funds that are the biggest counterparties to the largest and most complex U.S. banks fail to meet margin calls, liquidate their positions, and collapse. The defaults caused “moderate” losses of $8 billion for the banks, according to the Federal Reserve.
By comparison, the affected banks lost $17 billion from their own trading activities in the same scenario – more than double the losses attributed to the hedge fund failures. The Federal Reserve noted that although the results differed across the banks, the industry overall is well positioned to withstand extreme market stress.
Meanwhile, in the scenario, Global Systemically Important Banks (GSIBs) lost $33.3 billion, driven mostly by their own trading activity ($17.2), followed by exposure to hedge fund defaults ($7.7B), and credit valuation adjustments ($8.4B). Despite the size of the shock, banks were able to absorb the losses without threatening broader financial stability.
Why this matters for the U.S. financial system
The Federal Reserve’s stress tests showed that shocks tied to private credit and hedge funds were manageable. Large banks stayed well-capitalized, and losses from assumed hedge-fund failures were smaller than banks’ own trading losses.
Private credit serves real-economy borrowers without bank funding and is structured with closed-end capital and multi-year commitments, which are designed to limit the potential for rapid redemptions.
Conclusion
The 2025 stress test underscores that private credit and hedge funds, even under extreme conditions, are not major sources of systemic risk to the banking system. Banks remain well capitalized and capable of absorbing losses from these exposures.
Frequently Asked Questions
Is private credit a systemic risk to U.S. banks?
No. Under the Federal Reserve’s June 2025 exploratory scenarios, private credit was not a systemic risk to U.S. banks. Large banks stayed above minimum capital requirements after the modeled NBFI credit and liquidity shocks; the loss rate on loans to financial institutions was approximately 7%.
Did the Fed explicitly stress private-credit exposures?
Yes. The exploratory analysis applied a severe recession with credit deterioration at leveraged NBFIs and assumed full drawdowns on certain bank credit lines, capturing both credit and liquidity channels.
Did hedge-fund failures endanger banks?
No. In the Federal Reserve’s 2025 exploratory analysis, even with the assumed failure of five large hedge funds, losses were manageable, and banks stayed above minimum capital requirements.
