Banks And Private Credit: Familiar Bedfellows - Global Finance Magazine

Banks and private equity firms are converging in corporate debt markets in an unprecedented partnership that reflects shifting competitive dynamics in credit provision. Rather than viewing private credit as a competitive threat, traditional banks have adopted an "if you can't beat 'em, join 'em" strategy by directly financing private credit funds and participating alongside PE-backed lenders. This convergence stems from private credit's explosive growth since the 2008 financial crisis, during which the sector expanded from $200 billion in assets under management to $2.8 trillion today, according to the Bank for International Settlements.

The scale of this reallocation of credit intermediation is substantial. Bank lending's share of total US corporate borrowing has declined materially from 44% in 2020 to 35% in 2023, according to a Deloitte analysis of Federal Reserve data. Meanwhile, global outstanding private credit loan volumes have reached $1.2 trillion, with more than 87% of that volume concentrated in the United States. This structural shift reflects not merely cyclical market conditions but rather fundamental changes in how corporations access capital and which financial institutions mediate that access.

Corporate borrowers stand as immediate beneficiaries of this arrangement, gaining access to credit sources otherwise unavailable through traditional banking channels. Banks participate by lending directly to private credit managers to finance new loan originations or by providing leverage that enhances returns on private credit fund portfolios. This structure allows private credit firms to distribute capital across multiple smaller loans to businesses in different sectors, reducing concentration risk.

However, regulators have flagged emerging systemic risks embedded within this partnership. The intertwining of largely unregulated private credit vehicles with regulated bank lending raises concerns about the potential for government bailouts if loan portfolios deteriorate. Bank of England officials, including Lee Foulger, have specifically highlighted potential liquidity mismatches—situations where private credit funds' redemption obligations to investors may not align with the liquidity profiles of their underlying investments. As of year-end 2024, major US banks held $123 billion in committed exposures to private credit obligors, though this represents a modest share of the aggregate Tier 1 capital exceeding $1.6 trillion held by participating institutions. The trajectory of this partnership appears likely to deepen given the structural forces supporting it, though regulators continue assessing whether existing oversight frameworks adequately address emerging financial stability risks.