Wall Street is wondering what will happen to the booming private credit market if you know what’s going on

The explosion in private credit has come with a host of concerns, but one of the most recent concerns is that the sector has not suffered a large-scale decline. And so what does that mean for borrowers when there is a crisis?

When asked about the migration of assets to the non-bank sector at JPMorgan’s Investor Day earlier this week, Chairman and CEO Jamie Dimon said “we will compete. We will be fine.” But he added that the “question they should be asking is: What does this mean for the United States of America?”

“Many of the people who took out private credit loans will be stranded in the future [obscenity] hits the fan,” Dimon said. “Banks tend to work with the borrower and the middle market loans during the crisis. In the mark-to-market world of private credit, they have to book it as a fiduciary para

In other words, he said, “private credit hasn’t had to deal with high interest rates, hasn’t had to deal with the recession and hasn’t had to deal with high spreads.”

We don’t know how those workouts will work

The next day, the CEO of one of the largest private credit companies defended the industry and how it will act in times of stress. When asked on CNBC about Dimon’s recent comments, Ares management CEO Michael Arougheti responded: “False.”

“We have been investing in the private markets for 30 years; a loan is a loan, regardless of whether it is on a bank’s balance sheet or in a private credit fund,” Arougheti said. “[Ares has] have invested $150 billion in the private credit market since the company was founded, and we had a loss rate of one basis point. So everything we’ve seen over the last thirty years would indicate that the risk that people are trying to argue in our market is simply not true.”

Ares executive chairman Tony Ressler, who sat next to Arougheti in the CNBC interview, said the growth in private lending “will actually reduce systemic risk.”

“These assets end up on the balance sheets of companies that don’t have a lot of debt and don’t finance themselves with short-term liabilities or customer deposits,” Ressler said.

In January the Federal ReserveDefault rates for private loans were examined and how they compare with loans from traditional banks (leveraged loans and high-yield bonds). Citing KBRA DLD data, the Fed showed that “despite high debt structure, private credit loans have relatively low recovery rates from default (or equivalently exhibit high losses from default) compared to syndicated loans or HY bonds.”

We obtained updated figures from KBRA DLD on Thursday, which showed a more mixed picture when it comes to implicit recoveries. The average value of a direct loan after default was about 53.1 percent, lower than that of syndicated loans, which was 57.5 percent, but higher than that of high-yield bonds, which was 46.3 percent.

The Fed attributes part of this gap to the fact that private credit exposure is more focused on sectors with less collateral or tangible assets, such as software, financial services or healthcare.

But the faster private credit grows, the more closely linked it becomes to traditional banking. JPMorgan Executives at Investor Day said the company is the largest financier of private loan portfolios, and that it already has equity capital on its balance sheet that it uses in a direct lending format to corporate borrowers. The company is also developing a co-lending program to increase the amount of capital it can deploy in this area

So if the eventual downturn materializes in the economy, chances are it will affect you-know-what everyone. Some borrowers will feel the hit more than others