What the Private Credit Boom Means for Bank Lending Strategy
Private credit, the direct lending of nonbank funds to corporate borrowers, has vaulted into a dominant force in corporate finance. As reported by S&P Global, fundraising in 2025 exceeded $224 billion globally, up modestly year over year, underscoring persistent investor demand for yield outside traditional fixed income and bank channels.
In its further coverage of this issue, S&P Global also estimates that the private credit market now eclipses $1.7 trillion in assets under management, with record dry powder available for deployment and continued expansion into commercial and industrial lending, sponsor-backed deals, and real estate finance.
Why Private Credit Is Pressuring Traditional Bank Lending
Traditional lenders have ceded ground to private credit for several structural reasons:
- Regulatory and balance-sheet economics: Bank capital requirements, risk-weighting, and supervisory scrutiny make certain types of corporate lending more expensive to hold on balance sheet. Private credit managers, operating outside the banking regulatory perimeter, can structure loans without the same capital drag, allowing them to compete aggressively on terms while preserving returns.
- Speed, certainty, and structural flexibility: Particularly in the middle market, private credit is winning not by loosening standards but by offering disciplined underwriting paired with customization. Direct lenders can move faster than bank syndicates, tailor covenants to a borrower’s business model, and deliver execution certainty. In larger, sponsor-led deals, covenant-lite structures become more prevalent, appealing to borrowers prioritizing flexibility and speed over standardized bank documentation.
- Investor demand reshaping credit economics: Persistent demand from institutional investors for floating-rate, higher-yielding private assets has poured capital into private credit funds. That influx enables lenders to commit sizable checks and hold loans through maturity, reducing refinancing risk for borrowers and intensifying competition with banks on relationship-driven commercial and industrial lending.
Moody’s data show U.S. banks’ exposure to private credit channels (mostly via lending lines or financing to funds) now measures in the hundreds of billions, underlining banks’ indirect ties to the segment even as they lose direct market share.
How Banks Are Responding to the Rise of Private Credit
Financing the Competitors
As reported by PwC, many banks aren’t merely watching private credit siphon business; they’re financing it. Major institutions are expanding loans to private credit funds and nonbank financial institutions. These financings often sit senior in the capital stack and carry lower regulatory risk weights, making them capital-efficient ways to stay connected to deal flow.
This “lend-to-funds” approach keeps banks within the broader private lending ecosystem while sharing in fee income and access to sponsoring communities that might otherwise exclusively work with alternatives.
Joint Ventures and Partnerships
Banks and private credit managers increasingly craft strategic alliances rather than head-to-head competition. S&P Global’s ongoing coverage notes an observable rise in collaborative deals from referral arrangements and co-origination platforms to more formal joint ventures. This lift enables banks to leverage private credit distribution capacity while maintaining client relationships.
Partnerships also help banks offload risk (often in sectors like commercial real estate), while freeing balance sheet capacity to pursue traditional core banking activities.
Originate-to-Distribute and Risk Transfer Models
Some banks have adopted originate-to-distribute models where they source and underwrite credit using their relationship advantage, then syndicate or tranche portions to private credit funds and other institutional investors. This tactic, notes Credit and Collection News, keeps senior exposures on the balance sheet while transferring more volatile risk to partners.
Institutions like JPMorgan, Citigroup, and others have expanded direct lending initiatives and private capital advisory functions to capture private markets activity that historically flowed outside their walls, reports Forbes.
Balance Sheet Innovation and Nonbank Affiliates
Banks are also evolving by establishing nonbank affiliates or private credit-style vehicles, letting them offer direct lending solutions that mimic alternative lenders but still benefit from centralized infrastructure and client distribution networks. Regulatory and capital planning teams are central to these decisions — ensuring compliance while pursuing growth.
These innovations also give mid-sized and regional banks a foothold in markets (e.g., sponsor finance or specialty lending) that purely traditional balance sheets would resist.
Market Signals and Risk Considerations
Even as private credit grows, signs of stress are emerging. Recent MSCI data, as reported by Reuters, show a tripling of senior loan writedowns by private credit funds, driven by challenging credit conditions and higher rates.
This trend reminds bank leaders that private credit’s appeal is not all upside. Performance will ultimately be judged by loss experience in tougher cycles.
Fiscal interconnections between banks and private credit bring benefits, as well as potential risks. ProSight analysts (among other industry watchers) note that when banks fund private funds or extend credit lines to them, stress in the alternative sector can spill back into banks during downturns, magnifying liquidity strains.
Responsible risk governance and robust stress testing are therefore vital as banks deepen these ties.
What Bank Executives Must Monitor in Private Credit
At present, C-Suite priorities include:
- Evolve credit product platforms to offer differentiated value versus private credit
- Strengthen partnerships with alternative lenders while preserving credit and reputational risk controls
- Innovate balance sheet models that can support hybrid lending and funding flows without excessive capital drag
- Invest in strategic talent, especially in credit analytics, product strategy, and partnership management
This moment is less about whether private credit will endure and more about how banks choose to engage with it. Institutions that solely treat private credit as a rival run the risk of surrendering relevance in core lending relationships. Those that approach it as both a competitive threat and a strategic ally can reshape their balance sheets, deepen client ties, and preserve influence in corporate finance.
The winners will be banks that move decisively, aligning talent, capital, and partnerships to ensure they remain central to how credit is originated, structured, and distributed in a rapidly evolving market.
