The U.S. private credit market is facing a severe liquidity test, as the valuation of underlying assets plummets and investors initiate a wave of redemptions, risk is rapidly spreading from the shadow banking system to traditional banking.Wall Street Journal mentioned earlier that Deutsche Bank, exposed to approximately $30 billion in private credit-related risk, saw its stock price drop by as much as 6.1% during trading in Frankfurt, marking the largest single-day decline since April of last year.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/c077f298-bc56-49e5-bcb4-64c7824f8af0.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/c077f298-bc56-49e5-bcb4-64c7824f8af0.png"/>This indicates that the brewing private credit crisis has not stopped at the shadow banking system, and its impact on traditional banking is beginning to manifest.In the past few weeks, the speed of the crisis's spread has been astonishing. Blue Owl sold loans at a discounted price to cope with redemptions, which the market viewed as the &#34;margin call moment&#34; for private credit. Subsequently, BlackRock directly marked down a loan with a face value to zero in just three months, becoming the last straw that broke the market's back. Following this, several institutions, including Cliffwater and Morgan Stanley, announced restrictions on investor redemptions.The core trigger of this crisis lies in the rapid deterioration of underlying assets and liquidity exhaustion, with the market experiencing a vicious cycle from &#34;asset sell-off&#34; to &#34;full redemption restrictions,&#34; directly impacting investors with significant asset devaluation.At the same time, data shows that U.S. banks have unutilized loan commitments to non-deposit financial institutions (NDFI) amounting to $2.8 trillion, raising concerns about the crisis spreading to the broader financial system.<h2>From &#34;Margin Calls&#34; to Full Panic</h2>The crisis's ignition point can be traced back to the beginning of the year. According to reports from Barclays and UBS, the private credit industry has significant loan exposure to software and technology companies, with some portfolios having up to 55% of such assets. With the breakthrough advancements in AI technology, the market began to question the long-term viability and cash flow stability of these software companies, leading to a sharp decline in the prices of related stocks and bonds.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5e99f9fe-252d-4270-b359-278a0c2a6e8c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/5e99f9fe-252d-4270-b359-278a0c2a6e8c.png"/>As the truth about the damage to underlying assets surfaced, investor panic quickly escalated, and redemption requests surged. Blue Owl, managing over $300 billion in assets, was the first to respond, choosing to sell $140 million in loans at 99.7 cents to meet redemption demands. However, this move not only failed to calm the market but also exposed the lack of liquidity in the secondary market.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bb0fbeeb-aff2-447c-98d6-8e6eed0c240c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/bb0fbeeb-aff2-447c-98d6-8e6eed0c240c.png"/>Just a few days later, a similar situation occurred at BCRED, a private credit fund under Blackstone Group, one of the largest asset management companies in the world. Facing immense redemption pressure, its senior partners used $150 million of their own funds to fill the redemption gap in an attempt to avoid restricting redemptions.However, what happened next only added fuel to the fire. Just hours after Blackstone Group announced its solution, BlackRock announced that it would write down a $25 million tranche of subordinated debt to zero over three months and subsequently imposed a 5% redemption limit on its $26 billion HPS corporate loan fund, despite redemption requests from shareholders reaching as high as 9.3%.If Blue Owl's decision to start selling loans was a &#34;margin call moment,&#34; then BlackRock's statement about reducing loan values to zero was the last straw that broke the camel's back.Financial blog Zerohedge pointed out that BlackRock did what Blue Owl and Blackstone Group were desperately trying to avoid, as they were well aware that such actions would trigger more redemptions, forcing more sell-offs, leading to stock prices dropping from 100 to lower levels, creating a vicious cycle. At this point, everyone was truly fighting their own battles.<h2>Dominoes Falling in Succession</h2>BlackRock's impairment actions quickly triggered a chain reaction. Its $26 billion HPS corporate loan fund faced a 9.3% redemption request and ultimately decided to set the buyback limit at 5%. Subsequently, veteran interval fund manager Cliffwater also encountered record redemption requests of 14%, forcing it to &#34;pull up the drawbridge&#34; and limit the redemption ratio for the first quarter to 7%.&#34;If Cliffwater is the canary in the coal mine and the first domino in the 'bank run' we foresee, I wouldn't be surprised.&#34; David Rosen of Rubric Capital had previously warned. It turned out that his concerns were not unfounded. Morgan Stanley's nearly $8 billion North Haven private income fund soon followed suit, setting a redemption limit of 5% and only returning about $169 million, less than half of what investors requested.Even more shocking to the market was the report from the Financial Times that JPMorgan had begun to impair the collateral for loans to its private credit clients and restricted the loan amounts. This move undoubtedly exacerbated the liquidity pressure on private credit funds.<h2>Banking Industry Sounds the Alarm</h2>The turmoil in private credit inevitably affected the traditional banking sector that funds it.Deutsche Bank disclosed in its annual report that its private credit exposure, calculated at amortized cost, had risen to €25.9 billion (approximately $30 billion), accounting for 5% of its total loans. The report also showed that the bank's loan exposure to the technology sector (including software) had increased to €15.8 billion.Deutsche Bank is not alone. Data from the Federal Deposit Insurance Corporation (FDIC) shows that the U.S. banking industry’s loans to non-depository financial institutions (NDFIs) are growing rapidly, reaching $1.4 trillion by the end of 2025. Even more concerning is that banks have up to $2.8 trillion in undrawn loan commitments to these institutionsThis means that once private credit institutions face liquidity exhaustion and withdraw these credit lines on a large scale, banks will face significant default risks, with potential total exposure reaching $4.2 trillion.<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/27b7e048-65e6-4829-8467-78985c9c52ba.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/27b7e048-65e6-4829-8467-78985c9c52ba.png"/>As the crisis continues to unfold, the market is closely watching the upcoming first-quarter fund flow disclosures. Barclays warns that a series of negative fund outflow disclosures could further widen spreads and exacerbate market concerns. In this $2 trillion market turbulence, the firewall between private credit and traditional banks is facing a severe test

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The U.S. private credit crisis is spreading to traditional banking, with Deutsche Bank experiencing a stock price plunge due to an exposure of approximately $30 billion in related risks, marking the largest single-day drop in nearly a year. From Blue Owl's discounted loan sell-off triggering a "margin call moment," to BlackRock writing down a debt to zero within three months, Cliffwater and Morgan Stanley subsequently restricting redemptions, the dominoes are falling one after another, and the firewall between private credit and traditional banks is facing severe tests

- The U.S. private credit market is undergoing significant liquidity challenges as underlying asset valuations plummet, prompting a wave of investor redemptions that risk spreading from shadow banking to traditional banks.  
- Deutsche Bank reported exposure to approximately $30 billion in private credit risks, causing its stock to drop sharply, highlighting the escalating crisis's impact on the traditional banking sector.  
- With a total of $2.8 trillion in unwithdrawn loan commitments to non-depository financial institutions, the potential for wider financial system risk continues to grow, raising alarms within the banking industry.

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Deutsche Bank AG

FS Specialty Lending Fund

VG Financial

Financial Select Sector SPDR Fund

Pro Gbl Listed Pvt

Morgan Stanley

Eaton Vance High Yield ETF

Blue Owl Capital

Fidelity MSCI Financials Index

JPMorgan Chase

Goldman Sachs

Citigroup

American Express

Visa

Mastercard

The Margin Call has sounded! The "dominoes of American private credit are falling one after another."