Banks Eyeing Private Credit Market Share Reclaim Amidst Emerging Strains
Wall Street financial institutions are sensing a significant opportunity to reclaim market share lost to private credit lenders over the past decade. This potential resurgence is being fueled by emerging signs of strain within the private credit sector, coupled with a more favourable regulatory environment for traditional banks. Experts suggest that the balance of power, which had heavily favoured direct lenders, may be on the cusp of shifting back towards established banking institutions.
“This is an opportune time for banks to regain market share from private credit funds,” noted Mark Zandi, chief economist at Moody’s. He highlighted that declining interest rates and easing banking regulations, combined with the fallout from private credit lenders’ previously aggressive lending practices, are creating a more favourable landscape for banks.
The rapid growth of private credit was, in part, a consequence of banks’ withdrawal from certain lending activities. Following aggressive interest rate hikes by the Federal Reserve and the banking turmoil of 2023, lenders became more cautious, tightening underwriting standards and shying away from riskier deals. This created an opening for private credit providers, who often offered faster deal execution and more flexible terms, particularly appealing to private equity firms. The impact was substantial, with banks’ share of buyout financings exceeding $1 billion plummeting to just 39% in 2023, a stark contrast to the approximately 80% they held in the preceding five years. While this share has since seen a modest recovery to over 50% in 2025, the current market dynamics suggest a further shift may be on the horizon.
Private Credit Faces Mounting Pressures
The private credit sector is now confronting a confluence of challenges. Years of aggressive lending are beginning to manifest as increased default risks, as higher interest rates make it more difficult for heavily indebted borrowers to service their obligations. Concurrently, investor demand for liquidity is growing, with some clients looking to withdraw capital after extended periods of locked-in investments.
Moody’s Zandi anticipates a rise in credit problems within the sector in the coming months. He cited factors such as geopolitical tensions, elevated borrowing costs, and structural pressures within industries like software as contributing to these concerns. Borrowers in the consumer and healthcare sectors may also experience significant strain.
Regulatory Shifts Offer Tailwinds for Banks
Beyond market forces, regulatory changes are poised to further influence the competitive landscape. Shannon Saccocia, chief investment officer at Neuberger Berman, indicated that anticipated deregulation, particularly a potential weakening of the Basel III Endgame implementation, could steer business lending back towards the banking sector. The U.S. Treasury has also expressed an explicit aim to redirect lending activities to banks.
The Basel III “Endgame” framework, a comprehensive regulatory overhaul finalized in 2017 following the 2008 global financial crisis, was designed to standardise risk calculations for large banks and establish a capital floor requiring lenders to hold greater reserves against loans, especially those deemed higher-risk, such as corporate and leveraged lending. This framework had, in recent years, made bank lending less competitive compared to private credit funds.
A relaxation or reversal of these Basel III Endgame requirements could intensify competition for private credit lenders, a sentiment echoed by various market veterans. Zandi suggests that banks are well-positioned to swiftly fill any financing gaps left by a more cautious private credit sector, benefiting from a more favourable regulatory backdrop and improving funding conditions. Recent proposals by the Federal Reserve to adjust the regulatory capital framework could further enhance banks’ competitiveness in lending, potentially enabling them to reclaim a portion of their former commercial banking market share.
Evidence of this renewed appetite is already emerging. Recent multi-billion-dollar leveraged loan financings for companies like Electronic Arts and Sealed Air demonstrate banks’ willingness to undertake “jumbo” transactions when market conditions are conducive.
Private Credit Remains a Formidable Competitor
Despite these shifts, the dominance of private credit is far from over. Direct lenders continue to compete vigorously, offering innovative products like unitranche loans, which consolidate various debt components into a single package with a unified interest rate.
For instance, major players like Blackstone and Ares were among a consortium of 33 lenders that reportedly provided approximately $5 billion in financing to support Thoma Bravo’s acquisition of logistics company WWEX Group. This deal underscores the continued capacity of private credit firms to fund substantial buyout transactions, even as banks begin to re-engage in the market.
Marina Lukatsky, Pitchbook’s global head of credit and U.S. private equity, pointed out that the anticipated rebound in buyouts and dealmaking has not yet fully materialised this year. Uncertainty surrounding trade policy, interest rates, and geopolitical events has slowed activity across the board, leading to a decreased demand for financing from both banks and private credit providers.
For banks to achieve a significant comeback, Lukatsky noted that borrowing costs for syndicated loans need to become more competitive. Furthermore, a pickup in large buyout activity and an overall improvement in the broader economic outlook are crucial.
Crucially, private credit possesses inherent structural advantages that are challenging for banks to replicate. These include speed, certainty of execution, and flexibility in loan terms, qualities that some borrowers may continue to prioritise in an unpredictable market.
Nevertheless, the prospect of a comeback for traditional banks appears increasingly plausible. Jeffrey Hooke, a senior lecturer in finance at Johns Hopkins Carey Business School, described the situation as a “tug of war that is just starting.” He added, “The rules have been relaxed, so it’s only natural that banks want to get back some of their market share in private credit.”
