Shifting dynamics: private credit versus banks

Private credit, once described as 'shadow banking,' has moved from the margins to a mainstream financing channel, with non-bank financial intermediaries originating privately held loans directly to companies outside public debt markets. Globally, the sector's estimated assets under management stand at approximately $3 trillion to $3.5 trillion, driven by growth in investment-grade corporate debt and asset-backed finance. The US accounts for about 60 percent of global activity, while Europe's $530bn market represents close to 30 percent of global AUM. Asia-Pacific activity is projected to reach $92bn by 2027, with emerging markets including India and Latin America growing rapidly from smaller bases.

The article attributes much of the expansion to post-2008 regulation. Basel III raised bank capital requirements and risk weights, reducing lending capacity particularly for middle-market businesses. Vincenzo Bavoso, professor of commercial law at the University of Manchester Law School, argues that the shift also reflects banks' business models, as large multifunctional banks earn greater profits from capital markets activity than from traditional lending. Institutional demand for yield and diversification, including floating-rate protection and senior-secured positions, has further fuelled growth. Yerbol Orynbayev, a former World Bank Governor on behalf of Kazakhstan, points to persistent inflation and high interest rates, as well as the flexibility private lenders offer in bespoke, covenant-tailored structures compared with slower bank processes.

Opinions differ on permanence. Mr Bavoso says it is difficult to judge whether the expansion is a temporary market phase, while Mr Orynbayev contends that growth will continue, arguing that global systemically important banks are unlikely to regain their former lending access despite easing capital rules and delayed Basel III endgame implementation.

Rather than pure competition, banks and private credit increasingly collaborate. Research from the US Federal Reserve shows credit lines from the largest US banks to private credit vehicles rose about 145 percent between 2020 and 2024. The article cites Citigroup's origination networks and Apollo's capital base as examples of complementary partnerships. Mr Orynbayev warns that broader borrower access can lead to over-borrowing, particularly as delinquencies and defaults rise.

The article also highlights systemic risks, including hidden interconnections, valuation opacity and leverage. Mr Bavoso identifies bank exposures through direct lending, liquidity management, clearing, underwriting and warehousing as transmission channels for shocks. Mr Orynbayev cites the 2025 collapses of Tricolor and First Brands, which filed for bankruptcy amid fraud allegations including double-pledging of collateral to multiple warehouse lenders, as evidence of opacity risk.