Bank of England Governor Andrew Bailey has warned that the conflict in Iran could trigger a financial crisis similar to the 2008 meltdown.
Mr Bailey said turmoil in the $3trillion private credit sector, equivalent to around £2.2trillion, could spread across the global economy.
Speaking on Thursday in his role as Financial Stability Board chairman, he said Britain is already facing an energy shock alongside volatility in debt markets.
Mr Bailey drew comparisons with the sub-prime mortgage sector of the mid-2000s, whose collapse triggered a global banking crisis.
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He described private credit as "a relatively opaque world" that has not yet been tested under severe market stress.
Private credit refers to lending provided by hedge funds and other non-bank institutions rather than traditional lenders.
The sector typically offers higher returns than corporate and Government bonds. It has expanded rapidly since the 2008 financial crisis, growing from $2trillion in 2020 to $3trillion last year, according to Morgan Stanley.
This growth has been driven in part by lighter regulation compared with traditional banking.
Andrew Bailey warns private credit risks and Iran conflict could spark 2008-style financial crisis
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Neither UK nor US regulators directly oversee the sector, as it is largely used by institutional investors.
Mr Bailey said: "What if that coincides with one of these other things, let's say private credit, becoming a much bigger problem? What if the users and the investors in private credit lose confidence in it, and we get a bigger reaction?"
Regulatory concerns have increased following several high-profile failures.
In the United States, firms including TriColor and FirstBrands, both backed by private credit lenders, have encountered difficulties.
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Mr Bailey said an energy crisis was caused by the war in Iran
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In the UK, Market Financial Solutions collapsed earlier this year amid allegations of fraud.
JP Morgan chief executive Jamie Dimon warned of "cockroaches" in private credit and that losses could be "higher than expected".
There are signs that investor confidence may already be weakening, as investors sought to withdraw more than $20billion from private credit funds in the first three months of this year, according to the Financial Times.
Sir Keir Starmer may face an economic crisis in the coming months
| REUTERSMr Bailey said similar dynamics were seen during the sub-prime crisis: "It meant the sub-prime problem was worse than we imagined it could be if that dynamic had not happened."
The Governor warned that uncovering problems in one part of the sector could affect confidence more broadly.
He explained: "Do you start to lose confidence in the whole thing? I'm not saying it will happen this time – it depends on how investors react and what they think they are getting."