The Federal Reserve has begun a formal inquiry into major U.S. banks' connections to the $1.8 trillion private credit industry, prompted by rising troubled loans and investor withdrawals in the sector, Investing.com reports.

Private credit funds, which lend to companies outside traditional bank channels, rely heavily on investor capital rather than stable deposits. Recent global market disruptions from the Middle East conflict have triggered redemption pressures, exposing vulnerabilities unique to non-bank lenders.

Regulators worry that credit lines extended by banks to these funds could channel losses back into the banking system during downturns. Federal examiners are now embedding targeted questions into routine oversight to gauge the scale of this entanglement.

JPMorgan Chase, the world's largest bank by market capitalization at approximately $765 billion, exemplifies the ties. Its CEO, Jamie Dimon, recently flagged a lack of transparency and questionable valuation practices in private credit, though he did not deem it a full systemic threat. Shares trade at $284 with an analyst consensus target of $295 under an Outperform rating.

Firms such as Blackstone, a leading alternative asset manager with an $87 billion market cap, operate highly leveraged private credit portfolios. Blackstone shares stand at $112, with analysts assigning an Outperform consensus and a $145 target price.

The Financial Stability Board Chair, Andrew Bailey, cautioned this week about potential "non-linear" stresses ahead, linked to economic strains from the war in Iran.

This scrutiny unfolds against the Trump administration's efforts to ease Wall Street lending restrictions. While some Fed officials advocate lighter rules to let banks compete with nonbanks, the probe underscores caution around concentrated exposures.

Separately, the Treasury Department is examining insurers' roles in fueling nonbank lending growth over the past decade. The combined reviews aim to map risks without stifling innovation in credit markets.