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Private credit is now so intertwined with big banks and insurers that it could become a “locus of contagion” in the next financial crisis, a group of economists, bankers and US officials has warned.

Researchers from Moody’s Analytics, the Securities and Exchange Commission and a former top adviser to the Treasury Department found private credit funds have become enmeshed with the banking system, creating “new linkages [that] introduce new modes of systemic stress”.

“Their opaqueness and role in making the financial network more densely interconnected mean they could disproportionately amplify a future [financial] crisis,” the group said on Tuesday in a study published by Moody’s Analytics.

Private credit has boomed in recent years as regulations put in place following the 2008 financial crisis prompted banks to tighten their lending standards. Funds, which generally lend to riskier companies with significant debt loads, are subject to looser oversight than banks — something that has prompted concern as the sector has grown.

The report, written by Mark Zandi at Moody’s Analytics, Samim Ghamami of the SEC, and former Treasury adviser Antonio Weiss, is one of the most comprehensive analyses to date on how private credit would affect the broader financial system during a period of market upheaval.

The researchers relied on financial reporting and the stock prices of publicly listed middle-market corporate lenders, known as business development companies, as their proxy for the otherwise opaque private credit industry. They found that during recent moments of market stress, business development companies had become more tightly correlated with the turmoil in other sectors than they were previously.

“Today’s network of interconnections in the financial system is more distributed, with a denser web of connections than it had pre-crisis, when the system operated more like a ‘hub and spoke’ model with banks at the centre of the network,” the report said, noting that private credit firms, other speciality financial groups and insurers have taken a greater role in lending.

Private credit firms maintain they are better at lending than banks because they rely on capital from institutional investors with longer time horizons and not subject to “runs” such as bank deposits, which can lead to broader contagion in moments of panic.

“Banks are increasingly involved in private credit and other non-bank financial institutions through partnerships, fund financing and structured risk transfers that allow them to maintain economic exposure to credit markets while shifting assets off balance sheet,” the Moody’s Analytics study said.

The Boston Federal Reserve last month had similarly warned that banks were exposing themselves to new channels of risk by lending to private credit funds and other similar groups.

Fitch Ratings this week said that private credit’s “evolving products and asset classes requires close monitoring, with many untested through market cycles”.

The Moody’s Analytics report said the private credit sector should be required to share more public data on its lending, and for financial regulators to emphasise private credit in their overall “systemic risk monitoring”.

“The objective is not to stifle the beneficial innovation that private credit provides but to shine a light on its risks and linkages so that a rapidly growing part of corporate finance, and potentially other sectors, does not become a blind spot.”

Driving through rolling savannah plains in Kenya’s Maasai Mara National Reserve on her honeymoon, Liza Akhvledziani Carew saw elephants, lions and giraffes. She was reminded of the sheer vastness of the world and felt her “own little life” put into context.

For Ms. Akhvledziani Carew, the chief executive officer of a startup that helps Canadians earn more credit card points, travel is a non-negotiable budget item.

“It’s a big part of our lifestyle. That’s probably what I would spend most of my money on,” she said, adding that the couple pays for part of their travel with a “sophisticated [credit card reward] points strategy.”

The cost of travelling has soared in recent years, driven by the postpandemic travel boom, inflation and new taxes imposed by destinations affected by overtourism.

But for many Canadians, travel remains a high-priority spending area, regardless of rising costs. And it’s clashing with other financial goals.

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Kathleen Daunt, a financial adviser with the New School of Finance in Toronto, works with clients who are saving for a major financial milestone, most commonly to buy a home.

When she sits down with her clients and calculates the amount they’d need to save each month to reach that goal – which usually means not spending on travel – they balk at the trade-off.

“People expect to have all the items on their list of priorities. If anything, it means you have to understand your priorities and have flexibility,” she said.

She also said roughly two in five new clients will cite annual travel as one of their top financial goals.

Ms. Daunt said she sees the desire for travel as a mix of social media-induced fear of missing out, widespread burnout and a societal view of vacations as a right – all of which can make it easier to justify overspending.

“You have that same old expectation [of being able to take vacations] but everything just feels more pricey,” she said. “It’s so much money for a family of four or more to do an on-a-plane vacation.”

Canadians’ overseas trips were up 32 per cent in the July-to-September period last year from the same period a year earlier, and up 6.5 per cent from 2019, according to Statistics Canada’s most recent national travel survey. The amount they spent abroad also jumped, rising 20 per cent in 2024 from a year earlier and nearly 40 per cent from 2019.

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Even the trade war with the United States and growing possibility of a recession have not dimmed Canadians’ vacation ambitions. While travel south of the border by plane and car is down, Transat A.T. Inc. chief executive officer Annick Guerard said on a conference call with analysts in March that Canadians’ spending on transatlantic flights has not been affected.

According to estimates by Barry Choi, a personal finance and travel expert at moneywehave.com and regular Globe and Mail contributor, a two-week European vacation costs about US$5,050 ($7,000), though he noted the estimate was for a solo traveller, so couples or families should expect to pay notably more. Timing can significantly affect costs, with June to August the most expensive months.

In contrast, according to the Canada Mortgage and Housing Corp., Canadians’ average monthly mortgage payment at the end of 2024 was $2,042 (and much higher in Toronto, at $3,006, and Vancouver, at $3,053).

Rachel Dodds, a professor at Toronto Metropolitan University’s Ted Rogers School of Hospitality and Tourism Management who studies overtourism and consumer motivations for travel, said social media plays a huge role in stoking travel interest. According to data from TikTok, as of mid-2024 the app had seen a 410-per-cent increase in travel content views since 2021.

“Everyone has a phone, everyone consumes [travel content] – if you see a reel on Instagram you’re like, ‘Oh, I wanna go there,’” Prof. Dodds said. That goes both ways: While on vacation, people are much more likely to post photos for the “instant gratification” of likes and comments. “There’s an emotional and sharing aspect of it that didn’t exist before 15 years ago.”

Relative to previous decades, travelling is now more affordable and is seen as a right rather than a privilege in Western countries, Prof. Dodds said. And that increase in affordability has come at a time when many people, particularly millennials and Gen Zers, have more disposable income but feel other large financial goals are out of reach.

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“Travel has become a substitute for those kinds of things,” she said.

Prof. Dodds said we are an increasingly lonely society, and many people are travelling to connect with others to have meaningful, authentic experiences of other cultures. That’s given rise to sustainable travel, and nature-based trips and community experiences, rather than the traditional resort-based vacations.

While Ms. Daunt said none of her clients have ultimately chosen travelling over other financial goals, some have opted to delay major purchases. She said she usually sees people negotiating within their new budgets to downgrade from a trip every year to once every two or three years, or from pricier international trips to smaller ones close to home.

“It’s hard, because we have the push from feeling burnt out and I would argue expecting vacations. We live in a country where we feel like, ‘I deserve to be able to have vacations,’ and there’s this other push on the home-buying side where there’s so much FOMO when it comes to home purchasing despite a bonkers overpriced market,” she said. “We’re still putting those expectations on ourselves.”

A strategy of making small regular contributions to a dedicated travel savings account can be an effective way to save for vacations without compromising other travel goals, she said.

For Ms. Akhvledziani Carew’s part, when she and her husband bought their home a few years ago after years of rigorous monthly savings goals that mimicked what they expected to spend on mortgage payments.

They also tapped their investments, and her husband sold a condo he previously owned. She said they did slightly less-elaborate trips, but their points strategy meant they didn’t have to cut back much.

“It was a different position we were starting from,” she acknowledged, but added later “you build your lifestyle around the thing that’s most important to you.”