Key Points
- Banks are identifying increased opportunities to reclaim market share due to emerging strains within private credit and relaxed regulations.
- The private credit sector is grappling with rising defaults, liquidity pressures, and repercussions from aggressive lending practices.
- The potential resurgence of banks will depend on recovery in deal activity, tighter credit spreads, and an enhanced macroeconomic outlook.
Wall Street banks appear to be on the verge of seizing a long-overdue opportunity to reclaim market share from private credit lenders.
In the aftermath of a decade marked by the rapid growth of private credit lenders, who captured a significant portion of the leveraged buyout financing landscape, recent indicators of strain within that sector, along with a relaxation of banking regulations, suggest a potential shift in dynamics.
"This is an ideal moment for banks to regain market share from private credit funds," conveyed Mark Zandi, chief economist at Moody’s, in an email to CNBC.
"With interest rates decreasing and banking regulations softening, private credit lenders are facing challenges arising from their previous aggressive lending strategies," he emphasized.
The swift expansion of private credit was partly driven by banks stepping back. Following the aggressive rate hikes instituted by the Federal Reserve and the banking turmoil of 2023, traditional lenders tightened their underwriting processes and retreated from riskier transactions. Consequently, borrowers, particularly private equity firms, increasingly turned to direct lenders who provided quicker execution and more lenient terms.
The tug of war is just beginning. With the rules relaxed, it is only natural for banks to pursue the recovery of some of their market share in private credit.
Jeffrey Hooke
Johns Hopkins Carey Business School
The extent of this strategic shift was substantial. Data from PitchBook indicated that banks’ share of buyout financings exceeding $1 billion plummeted to just 39% in 2023, a steep decline from approximately 80% in the five years leading up to that date. However, by 2025, that share had rebounded to just over 50%.
Furthermore, signs indicate that the trend may continue to evolve.
Private credit is currently confronting significant obstacles. Years of constructive lending practices are now backfiring, as elevated interest rates hinder the ability of heavily indebted borrowers to service their loans, thereby escalating default risks. Additionally, there is a growing demand for liquidity, with some investors opting to retract funds after years of committed capital.
Zandi from Moody’s anticipates that the sector will "encounter further credit issues in the months ahead," citing factors such as geopolitical tensions, heightened borrowing costs, and structural pressures in certain industries, including software. Borrowers in the consumer and healthcare sectors may also face increased financial strain.
Regulatory changes offering tailwinds
In the medium term, adjustments to regulations could further favor banks.
"Our projections regarding a potential deregulation under the Trump administration suggest a likely weakening of the Basel III Endgame framework, as the U.S. Treasury explicitly seeks to guide business lending back into the banking sector," stated Shannon Saccocia, chief investment officer at Neuberger Berman, in a correspondence with CNBC.
The Basel III “Endgame” framework, finalized in 2017 following the 2008 global financial crisis, was intended to standardize how large banks assess risk and establish a capital floor requiring lenders to maintain more reserves against loans, particularly in the realm of higher-risk corporate and leveraged lending.
This regulatory environment has made traditional bank lending less competitive in comparison to private credit funds in recent years, as noted by industry veterans.
A potential weakening or reversal of the Basel III Endgame could intensify competition for private credit lenders, Saccocia posited, a sentiment echoed by other market experts.
"Banking institutions should promptly fill any gap left by more cautious private credit lending," observed Zandi, referencing an increasingly favorable regulatory environment and improved funding conditions for conventional lenders.
Recent proposals from the Federal Reserve to amend the regulatory capital framework could "position banks to enhance their competitiveness in the lending landscape, aiming to recover at least a portion of their traditional commercial banking market presence," stated Lukatsky.
Recent transactions, including substantial leveraged loan arrangements for Electronic Arts and Sealed Air, indicate a strong willingness among banks to engage in "jumbo" deals whenever market conditions permit.
Private credit still competitive
Nonetheless, the presence of private credit remains robust. Direct lenders continue to assertively compete, providing unitranche loans that consolidate different types of debt into a single package with a uniform interest rate.
For instance, Blackstone and Ares were identified as part of a consortium of 33 lenders that collectively offered approximately $5 billion in financing for investment firm Thoma Bravo’s acquisition of logistics company WWEX Group, showcasing how private credit firms can still facilitate large buyout transactions even as banks re-enter the market.
Marina Lukatsky, Pitchbook’s global head of credit and U.S. private equity, noted that the anticipated resurgence in buyouts and deal-making has yet to materialize this year, primarily due to uncertainties surrounding trade policies, interest rates, and geopolitical factors, which have curtailed market activity. This slowdown has consequently reduced the demand for financing from both banks and private credit providers.
For banks to facilitate a significant recovery, it will be essential for borrowing costs related to syndicated loans—large loans arranged by banks and financed by a collective of lenders—to become more competitive. Additionally, the revival of large-scale buyout activities and an overall improvement in the economic landscape are vital.
Importantly, private credit maintains certain structural advantages that are challenging for banks to emulate, including speed, execution certainty, and adaptable terms, which are attributes that some borrowers may continue to prioritize in volatile conditions, according to experts.
Nevertheless, the potential for a comeback is evident.
"The tug of war is just beginning," remarked Jeffrey Hooke, senior lecturer in finance at Johns Hopkins Carey Business School.
Conclusion
The relaxation of regulations naturally incentivizes banks to pursue a recovery of their market share in private credit.
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