Migration of corporate lending from banks to private credit: Key drivers and market implications

One of the most pronounced trends in banking and commercial lending markets in the United States since the financial crisis of 2008-2009, has been the rapid growth of private credit and its expansion into corporate lending, which had previously been dominated by commercial banks. This related trend has been due to the increased exposure of banks to private credit lenders and non-depository financial institutions ("NDFIs") generally, as banks have to a substantial extent substituted lending to credit market intermediaries for direct lending to corporate borrowers.

As discussed in this article, the partial withdrawal by banks from at least some types of corporate lending has been driven in part by certain prudential regulatory measures applicable to the U.S. banking industry that were put in place following the financial crisis in an attempt to prevent a recurrence of that crisis and to address perceived risks to U.S. financial stability. However, the shift of corporate lending from banks to unregulated NDFI intermediaries (referred to by some commentators as the "shadow banking system") was most likely not the result that had been intended.

That shift of corporate lending from the regulated banking sector – where loan quality, underwriting standards and mitigation of default risk are the subject of regular and comprehensive examinations by federal and state bank regulatory agencies – to private credit lenders who are not subject to prudential regulation¹, and the replacement by banks that are certain of their direct lending to corporate borrowers with the provision of credit lines and other funding to private credit lenders and other NDFIs, has become a source of increasing concern for U.S. federal bank regulatory agencies. In particular, Governor Michelle Bowman, Vice Chair for Supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve"), has noted that, "the growth of lending in the shadow banking system can have significant consequences for the availability of credit over economic cycles, with losses eventually being transferred to regulated depository institutions, as appears to have occurred after the 2008 financial crisis," and that when lending activities are pushed out of the regulated banking system, "losses may be transmitted back into the banking system through related activities like the extension of credit by banks to those same nonbank lenders."²

This article examines some of the key drivers for these trends and also discusses how the U.S. federal bank regulatory agencies are responding to the alleged risks posed by these shifts to U.S. banking markets and U.S. financial stability.

Regulatory Drivers of the Migration of Corporate Lending from Banks to Private Credit

Federal Reserve Governor Bowman has observed that:

• When regulatory requirements become disproportionately burdensome relative to risk and banks simply curtail the targeted activities. . . [t]his leaves a deficit between demand for banking services and banks that are willing to provide them. When banks are no longer willing to provide specific services, nonbanks step in to meet those needs, and the activity is essentially pushed out of the regulated banking system; and
• This includes the migration of corporate lending from banks to nonbanks.³

Although there are a wide variety of ways in which the conduct of bank activities is subject to regulatory requirements and restrictions that are not applicable to NDFIs conducting the same types of activities, it is generally understood that the regulatory capital requirements for U.S. banks and their holding companies⁴ and the Leveraged Lending Guidance issued by the U.S. federal bank regulatory agencies in 2013⁵, have had a disproportionate impact on the migration of corporate lending from banks to private credit, particularly for lending to borrowers with higher levels of leverage.

Regulatory Capital Requirements

Federal Reserve Governor Bowman has observed that:

• There is no mystery about what drove the shift in corporate lending away from banks. While post-2008 financial crisis reforms strengthened bank capital and liquidity — which were necessary to promote the safety and soundness of banks and U.S. financial stability — they did so with unintended consequences. Attempts to address legitimate gaps resulted in some requirements becoming excessive relative to underlying risk, forcing banks to pare back on some corporate lending activities or to raise the cost of credit to borrowers; and
• The effects of the current framework become clear when we examine the incentive structure that it creates. Current capital rules create a perverse incentive — ironically, banks receive a more favorable treatment for lending to private credit funds than for lending directly to creditworthy corporations. This treatment encourages banks to finance intermediaries rather than directly serving end-borrowers.⁶

Specifically, under the standardized approach⁷ in the U.S. bank regulatory capital regulations that are currently in effect, the generally applicable risk weighting for most types of corporate exposures is 100 percent of the amount of the exposure. There is generally no reduction in risk weighting for a loan by a bank to a corporate borrower based upon the borrower's credit rating.

In contrast, a bank loan to a private credit fund or a BDC can at least in some cases be structured as a securitization exposure under the regulatory capital regulations. The "simplified supervisory formula approach" in those regulations for assigning risk weightings to securitization exposures generally provides for a risk weight floor of 20 percent of the amount of the exposure.

As a result, bank lending to private credit funds and BDCs can require substantially less regulatory capital for the lending bank than would be required for a loan by the bank directly to the corporate entity that is borrowing from the private credit fund or BDC.

Leveraged Lending Guidance

The Leveraged Lending Guidance and the FAQs were adopted in the period following the 2008-2009 financial crisis when Congress and the federal bank regulatory agencies were imposing increasingly stringent restrictions and requirements on the U.S. banking industry in an attempt to prevent a recurrence of the crisis. Which in the view of many commentators, resulted in large part from loose lending standards by banks and other lenders, and to limit the perceived risks to U.S. financial stability.⁸

The Leveraged Lending Guidance and the FAQs were prescriptive in nature, containing some quite specific regulatory expectations for banks' leveraged lending activities, which were sometimes regarded by the banking industry as "bright line" tests. In particular, with regard to bank underwriting standards for leveraged loans, the Leveraged Lending Guidance stated that "a leverage level after planned asset sales (i.e., the amount of debt that must be serviced from operating cash flow) in excess of 6X Total Debt/EBITDA raises concerns for most industries."⁹

A bank that originated a leveraged loan, rated as a non-pass at inception because the loan did not meet those standards or the other limitations and requirements in the Leveraged Lending Guidance and the FAQs, risked examiner criticism and potentially an examination ratings downgrade for engaging in unsafe and unsound lending practices, even where the loan was originated by the bank solely for distribution rather than for the bank's own loan portfolio.¹⁰

The OCC and the FDIC announced in December 2025 that those agencies were formally withdrawing from the Leveraged Lending Guidance and the related FAQs. In their Interagency Statement on that withdrawal,¹¹ the OCC and the FDIC stated that the Leveraged Lending Guidance and the FAQs were:

• "Overly restrictive and impeded banks' application to leveraged lending of the risk management principles that guide their other business decisions. This resulted in a significant drop in leveraged lending market share by regulated banks and significant growth in leveraged lending market share by nonbanks, pushing this type of lending outside of the regulatory perimeter."

Although the Federal Reserve has not yet announced whether it will also be formally withdrawing from the Leveraged Lending Guidance, a Federal Reserve staff publication has noted that the Leveraged Lending Guidance "likely contributed to the post-[Great Financial Crisis] decrease in the market share of corporate loans held by banks, especially in the riskiest segment of corporate lending."¹² FDIC staff publications have also noted that "NDFIs, particularly those typically known as ‘private credit funds,' have stepped in to supply this market."¹³ Leverage levels in excess of those prescribed by the Leveraged Lending Guidance are now seen with some frequency in corporate lending by private credit funds, BDCs and other NDFIs.

Business and Financial Drivers of Migration of Corporate Lending to Private Credit

In addition to the regulatory drivers for the migration of corporate lending from banks to private credit funds, BDCs and other NDFI lenders, there are a number of business, structural and financial factors that have contributed to that trend. Federal Reserve Governor Bowman has observed that:

• NDFIs serve legitimate functions through their specialization in narrow market segments, speed of origination, and flexibility in credit terms. They are well-suited to provide long-term loans to borrowers that may be unsuitable for banks — typically, smaller and riskier borrowers — financed with locked-in capital from institutional investors. BDCs, for instance, make most of their loans at spreads of 400 basis points or more, whereas large banks make most of their loans at 200 basis points or less.¹⁴

A Federal Reserve staff publication has also observed that the growth of private equity is also responsible for the growth of private credit, as private equity typically needs debt financing for buyouts and acquisitions and private credit lenders are often better suited to provide — and increasingly do provide — that type of financing compared to syndicated bank lending.¹⁵ That publication also noted that "the growth of private credit is also driven by its relative attractiveness to borrowers and investors."¹⁶

• Borrowers and their private equity sponsors might prefer [the] private credit market over public credit markets due to easier and faster origination processes as private credit deals do not require syndication or ratings, hence no sharing of company financials with a large group of potential lenders. Also, as there is no syndication of a private credit loan following its origination, the pricing of the loan does not allow for market flex terms, which lead to uncertainty regarding the final pricing of loans issued in the leverage loan market. Although private credit loan contracts tend to be more covenant-heavy than their public counterparts, higher creditor control brings the benefit of being able to provide more customized loan terms. For instance, private credit loan contracts might include payment-in-kind (PIK) clauses which enable a borrower to defer its interest payments and add them into the principal if the borrower faces challenges during the loan lifespan. Delayed-draw term loan features also provide much needed financial flexibility to borrowers, as most of these borrowers are private equity buyouts and need financing along the way for future growth opportunities, such as new acquisitions. Furthermore, having a post-origination renegotiation when a company faces challenges is much easier under a private credit loan contract as it involves only a single lender or a few.¹⁷

As noted above, the ability of private credit funds, BDCs and other NDFI lenders to lend to borrowers with higher levels of leverage than would be possible for a syndicate of bank lenders – even following the withdrawal by the OCC and the FDIC from the Leveraged Lending Guidance – is also a major factor for the growth of buyout and acquisition financing by nonbank lenders.

Additionally, private credit funds and similar nonbank lenders benefitted from, and grew dramatically as a result of, an influx of capital into alternative investments by investors seeking higher yields during the low-interest rate environment that prevailed in the years following the 2008-2009 financial crisis through the COVID-19 pandemic.¹⁸

Regulatory Response to Partial Retreat of Banks from Corporate Lending and Increasing Exposure of Banks to Nonbank Lenders

As noted above, the OCC and FDIC have formally withdrawn from the Leveraged Lending Guidance and the FAQs, explaining that the guidance was "overly restrictive" for bank lending and responsible for pushing leveraged lending outside of the regulated bank market. Although the Federal Reserve has not taken any comparable action at this point, for the reasons discussed in our Client Alert on the OCC and FDIC action¹⁹ it seems doubtful that the Federal Reserve and its bank examiners are now treating the Leveraged Lending Guidance — to the extent that they are continuing to apply that guidance — as anything other than non-binding supervisory guidance on the risks posed to banks by leveraged lending transactions.

As a result, banks should have somewhat more flexibility as a regulatory matter to extend loans with leverage levels or other features than would have been possible had the Leveraged Lending Guidance remained fully in effect, although the extent to which banks will be in a position to recapture at least some of that lending business from the nonbank lenders that have come to dominate in that specific sector of the credit markets remains unclear.

Additionally, Federal Reserve Governor Bowman, in her May 2026 speech, has identified the steps that the Federal Reserve – in conjunction with the other federal bank regulatory authorities – is taking to address the alleged risks posed by the growth of the "shadow banking system" that has resulted from the migration of corporate lending from banks to private credit and other nonbank lenders and the substitution by banks of their direct lending to corporate borrowers with the provision of credit lines and other funding to private credit funds and other nonbank lenders.

The primary step being taken by the Federal Reserve, in conjunction with the OCC and the FDIC, has been the March 2026 proposal for the updating of the agencies' Basel III regulatory capital regulations,²⁰ which if adopted in final form would reduce the risk weightings for certain types of corporate loans and other bank loans, among other proposed changes. In particular, the proposal would:

• Replace the Internal Models approach and the standardized approach that the largest U.S. banking organizations have been required to use to determine credit risk weightings with a new "expanded risk-based approach," which would provide for standardized credit risk weightings for various categories of exposures that reflect more granular risk measures such as the assessed creditworthiness of corporate borrowers, loan-to-value ratios for residential mortgages and other real estate exposures, and repayment history for retail exposures. Under that proposed approach, a bank exposure to a corporate obligor that is investment grade (based on the banking organization's internal ratings system) would be subject to a 65 percent minimum risk-weighting compared to the 100 percent risk weighting that currently applies under the regulatory capital rules to corporate exposures generally; and
• Update the standardized approach that generally applies to smaller U.S. banking organizations as well as to the largest banking organizations in order to incorporate more granular measures of credit risk that are particularly material to bank lending, such as those noted above for the expanded risk-based approach. The proposals would also reduce the standardized risk weight applicable to corporate exposures generally from 100 percent to 95 percent and the risk weight applicable to all assets not specifically assigned a different risk weight under the rule from 100 percent to 90 percent.

As explained by Federal Reserve Governor Bowman in her May 2026 speech, these changes are intended to reduce the gap in risk weights between bank loans to nonfinancial businesses and bank loans to NDFIs.²¹ However, given that (as noted above) private credit loans are often either unrated or rated below investment grade and typically involve borrowers with higher levels of leverage compared to borrowers from banks, it is unclear to what extent the changes to the risk weightings that are being proposed would slow or reverse the migration of corporate lending from banks to private credit, at least for lending to sub-investment grade borrowers.²²

Governor Bowman noted in her May 2026 speech that the proposed changes in risk weightings for bank loans are not intended by the federal bank regulatory agencies to eliminate private credit from the market, but rather are intended to address the situation where creditworthy businesses that could be served by banks instead turn to private credit primarily because of excessive regulatory burden for bank lenders.²³ She observed that there is a role for both banks and NDFIs in providing credit to private companies given that some lending by NDFIs is riskier and better kept outside of regulated financial institutions, and that "the optimal outcome preserves this division of credit provision. Private credit funds and banks can effectively serve different parts of the market."²⁴

Governor Bowman also announced in the May 2026 speech that the Federal Reserve is seeking to update certain regulatory reporting requirements for banks in order to obtain more information on bank lending to NDFIs, so that the Federal Reserve can better measure and monitor the types of risk posed to the banking system by such lending.

• Our current data reporting relies on industry classification codes that are too broad to effectively measure these specific exposures.
• The current industry code for «Other Financial Vehicles» includes hedge funds, private equity funds, private credit funds, BDCs, special purpose entities, and asset-backed security issuers — without further distinction. This lack of granularity makes it difficult to assess concentration risks, measure interconnectedness, or calibrate capital requirements to actual risk.
• Therefore, the [Federal Reserve] Board will update our regulatory reporting to ensure that supervisors have transparency into bank lending to NDFIs. The update requires the largest banks to report financial information about NDFIs to which they extend credit, including total assets, net income, and leverage that enable an analysis of credit underwriting and ongoing risk assessments.²⁵

Conclusion

It remains to be seen whether the planned regulatory response to the migration of corporate lending from banks to private credit and the concomitant increase in banks' exposure to NDFIs will be sufficient to slow or reverse those trends, which are now fairly deeply entrenched. That is particularly so in light of the fact that those changes resulted in substantial part from business and financial factors independent of the incentives (or disincentives) for bank lending created by the regulatory approach adopted by the federal bank regulatory agencies and Congress following the 2008-2009 financial crisis. Additionally, it is possible that as a result of a change in U.S. administrations following the 2028 election there will be changes in the leadership of the federal bank regulatory agencies and in the approach taken by those agencies in responding to these trends.

_{1 Although private credit lenders in most cases are not subject to a prudential regulatory regime such as that which applies to banks in the United States, those lenders and/or the entities that advise and manage them are commonly subject to regulation by the Securities and Exchange Commission ("SEC") under the federal securities laws. Private credit lenders that are organized as private, closed-end funds – unlike public funds -- are typically not registered with the SEC under the Investment Company Act of 1940 ("Investment Company Act"), but a private fund adviser that manages private fund assets of at least $150 million is generally required to be registered with the SEC as an investment adviser under the Investment Advisers Act ("Advisers Act"). Most investment advisers to private credit funds are so registered and as a result are subject to SEC regulation under the Advisers Act, which provides for a regulatory framework rooted in fiduciary duty, and must confidentially report detailed information to the SEC about their funds on SEC Form PF. See Remarks by SEC Commissioner Hester M. Pierce at SIFMA/Mayer Brown Private Credit Forum, "Temporarily Terrified by Thomas: Remarks on Private Credit" (Oct. 15, 2024), https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-private-credit-forum-101524#_ftnref45; American Investment Council, "Private Credit – Investing in Main Street" (2021), https://www.investmentcouncil.org/wp-content/uploads/2021/03/private-credit-investing-in-main-street.pdf ("Private Credit – Investing in Main Street"). Additionally, as further explained below, private credit lenders that are organized as business development companies ("BDCs") are registered with the SEC under the Investment Company Act and are subject to various regulatory requirements under that Act.
2 Remarks by Federal Reserve Governor Michelle W. Bowman at The Wharton Financial Regulation Conference, "The Consequences of Fewer Banks in the U.S. Banking System" (April 14, 2023), https://www.federalreserve.gov/newsevents/speech/files/bowman20230414a.pdf ("Governor Bowman April 2023 Speech").
3 Id. See also, Governor Bowman April 2023 Speech, noting that there is "disparate regulation" for similar activities conducted by banks and nonbank financial entities, with the latter often operating with many fewer constraints, including a lack of capital requirements, activities restrictions, and a lesser degree of supervision and oversight. Governor Bowman also observed that nonbanks may also conduct less due diligence and have lower lending standards than banks.
4 See, e.g., Federal Reserve Regulation Q (Capital Adequacy of Bank Holding Companies, Savings and Loan Holding Companies, and State Member Banks), 12 C.F.R. Part 217. The Office of the Comptroller of the Currency ("OCC") has generally comparable regulatory capital regulations for national banks and federal savings associations (12 C.F.R. Part 3, Capital Adequacy Standards) and the FDIC has generally comparable regulatory capital regula5tions for FDIC-supervised banks and savings associations (12 C.F.R. Part 324, Capital Adequacy of FDIC-Supervised Institutions).
Federal Reserve, OCC and FDIC, Interagency Guidance on Leveraged Lending, 78 Fed. Reg. 17766 (March 22, 2013) ("Leveraged Lending Guidance"). The Leveraged Lending Guidance was supplemented by a set of FAQs issued by the federal bank regulatory agencies in 2014 (the "FAQs").
6 Governor Bowman May 2026 Speech, supra (citation omitted).
7 The standardized approach, which is applicable to all U.S. banking organizations, provides for a calculation of the banking organization's risk-weighted assets by applying specific percentage risk weightings to various categories of assets, such as sovereign exposures, exposures to U.S. depository institutions and foreign banks, corporate exposures and residential mortgage exposures. Larger U.S. banking organizations ("Category I" and "Category II" banking organizations under the Federal Reserve's Enhanced Prudential Standards regulations) are also generally required to make a separate calculation of risk-weighted assets based upon the banking organization's internal models (the "Internal Models approach"), with the more stringent of the two sets of calculations being binding for purposes of the amount of regulatory capital the banking organization is required to maintain.
8 In their 2012 proposed rulemaking release for the Leveraged Lending Guidance, the OCC, the FDIC and the Federal Reserve stated that since the previous issuance in 2001 of interagency guidance on sound practices for banks' leveraged finance activities, the agencies had "observed tremendous growth in the volume of leveraged credit." The agencies also observed that bank credit agreements had come to frequently include features that provided relatively limited lender protection, including "the absence of meaningful maintenance covenants" and "the inclusion of payment-in-kind toggle features." OCC, FDIC and Federal Reserve, "Proposed Guidance on Leveraged Lending," 77 Fed. Reg. 19417 (March 30, 2012).
9 The Leveraged Lending Guidance and the FAQs also cautioned banks that, with regard to the federal bank regulatory agencies' risk rating system for bank credit exposures, the agencies would generally expect a borrower to demonstrate the ability to fully amortize senior secured debt or the ability to repay at least 50 percent of total debt over a five- to seven-year period. A loan to a borrower that did not meet those de-levering guidelines, particularly where refinancing was "the only viable option," would be at risk of being rated by the agencies as "non-pass" (i.e., special mention, substandard or doubtful) even if the loan had been recently underwritten, unless the borrower possessed other compensating means of financial support.
10 Some reports indicated that banks had been told by their bank examiners to treat the Leveraged Lending Guidance and the FAQs as binding regulations rather than as the non-binding guidance that they actually were as a matter of law, and also that failures by particular banks to comply with the specifics of the Guidance and FAQs had been the basis of examination criticisms and "matters requiring attention" warnings to bank management. See "Monetary Policy and the State of the Economy," hearing before the House Committee on Financial Services (Feb. 27, 2018) available at https://financialservices.house.gov/uploadedfiles/115-76.pdf (remarks of Rep. Luetkemeyer).
11 "Interagency Statement on OCC and FDIC Withdrawal from the Interagency Leveraged Lending Guidance Issuances" (Dec. 5, 2025), available at https://www.occ.gov/news-issuances/bulletins/2025/bulletin-2025-44a.pdf.
12 FEDS Notes -- Private Credit Growth and Monetary Policy Transmission, supra.
13 FDIC, Banking Issues in Focus -- Bank Lending to Non-depository Financial Institutions, supra.
14 Governor Bowman May 2026 Speech, supra.
15 FEDS Notes -- Private Credit Growth and Monetary Policy Transmission, supra.
16 Id.
17 Id.
18 Runway Growth Capital, The Rise of Private Credit, https://runwaygrowth.com/the-rise-of-private-credit/.
19 Comptroller of the Currency and FDIC withdraw from Interagency Leveraged Lending Guidance (Dec. 18, 2025), https://www.whitecase.com/insight-alert/comptroller-currency-and-fdic-withdraw-interagency-leveraged-lending-guidance.
20 Federal Reserve, OCC and FDIC, Notice of Proposed Rulemaking: Regulatory Capital Rules: Regulatory Capital and Standardized Approach for Risk-Weighted Assets, 91 Fed. Reg. 15332 (March 27, 2026).
21 Governor Bowman May 2026 Speech, supra. Governor Bowman also explained that the proposed changes to the regulatory capital rules "will increase competition in ways that benefit borrowers" and reduce alleged risks to financial stability by "[enabling] banks to compete more effectively with NDFIs in serving creditworthy businesses." Id.
22 Some reports have also noted that the proposed changes to the risk weightings under the bank regulatory capital rules would also lower the generally applicable risk floor for securitization exposures from the 20 percent level in the current regulations to 15 percent. Given that bank credit facilities to BDCs and similar nonbank lenders can at least in some cases be structured to qualify as securitization exposures, this reduction in the risk weighting for securitization exposures could mean that banks would still have an incentive under the regulatory capital rules as revised to lend to nonbank credit intermediaries rather than lending directly to corporate borrowers. See Wall Street Journal, "New Bank Regulations Could Favor Loans to Private Credit; Proposed Changes to Bank Capital Regulations Risk Adding Incentives to Lend to Other Lenders" (March 25, 2026).
23 Governor Bowman May 2026 Speech, supra.
24 Id.
25 Id. As a further indication of regulatory concern over the substantial growth of bank exposures to private credit funds and other NDFI lenders, it has been reported that the Federal Reserve, apparently on an ad hoc basis, asked major U.S. banks for details about their exposure to private credit following a surge in redemptions from private credit funds and a rise in troubled loans in the private credit industry. Bloomberg, "Fed Seeks Details on US Banks' Exposure to Private Credit Firms" (April 10, 2026), https://www.bloomberg.com/news/articles/2026-04-10/fed-seeks-details-on-us-banks-exposure-to-private-credit-firms.}

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