By Layla Zulfa 
Wall Street’s major financial institutions appear to be on the cusp of a significant opportunity to claw back market share from the burgeoning private credit sector, marking a potential pivot in the competitive landscape of leveraged finance. After more than a decade of rapid expansion that saw private credit lenders capture a substantial portion of financing for leveraged buyouts, emerging signs of stress within that sector, coupled with anticipated easing of banking regulations, are now creating conditions favorable for traditional banks. This evolving dynamic suggests a rebalancing could be underway in the lucrative, yet often volatile, world of high-yield debt.
"This is an opportune time for banks to regain market share from private credit funds," affirmed Mark Zandi, chief economist at Moody’s, in an email commentary to CNBC. Zandi highlighted several converging factors contributing to this shift, noting, "Interest rates have declined and banking regulation has eased. Private credit lenders are also struggling with the fallout from their previously aggressive lending." This confluence of events signals a potential reversal of fortune for an industry segment that has dramatically reshaped corporate finance.
The Ascent of Private Credit: A Decade of Disruption
The meteoric rise of private credit was not an accidental phenomenon but rather a direct consequence of a paradigm shift in financial regulation and market dynamics following the 2008 global financial crisis. In the wake of the crisis, legislative responses like the Dodd-Frank Act in the United States and international frameworks such as Basel III imposed stricter capital requirements and risk management protocols on traditional banks. These regulations, designed to enhance financial stability, inadvertently compelled banks to retreat from riskier lending activities, particularly in the leveraged buyout (LBO) market, where debt-to-equity ratios are typically higher.
This regulatory tightening created a significant void, which non-bank direct lenders were swift to fill. Private credit funds, operating outside the stringent regulatory purview of traditional banks, offered an attractive alternative for borrowers, especially private equity firms seeking to finance acquisitions. These funds provided speed, certainty of execution, and often more flexible terms than their bank counterparts, which were increasingly constrained by regulatory hurdles and internal risk committees. The ability to offer "unitranche" loans—a single debt facility combining senior and junior tranches—further simplified the financing process for borrowers, making private credit an increasingly preferred option.
The growth statistics underscore this dramatic shift. According to data from PitchBook, the share of buyout financings exceeding $1 billion that was handled by banks plummeted from approximately 80% in the five years preceding 2023 to a mere 39% in 2023. During this period, the private credit market’s assets under management (AUM) surged, growing from roughly $300 billion in 2010 to an estimated $1.5 trillion by 2023, with projections suggesting it could reach $2.7 trillion by 2028, according to various industry reports. This exponential growth transformed private credit from a niche segment into a formidable force in global finance, often referred to as a critical component of the "shadow banking" system due to its less regulated nature.
Cracks Emerge: Strains in the Private Credit Sector
While private credit’s expansion seemed boundless for years, the landscape is now presenting significant challenges. A period of aggressive lending, often characterized by looser covenants and higher leverage ratios, is beginning to show its vulnerabilities, particularly against a backdrop of elevated interest rates. The Federal Reserve’s aggressive rate-hiking cycle, initiated in early 2022 and sustained through 2023, significantly increased borrowing costs for heavily indebted companies. This has made it increasingly difficult for many leveraged borrowers, particularly those with floating-rate debt structures common in private credit deals, to service their loans, leading to higher default risks.
Moody’s chief economist Mark Zandi anticipates that the private credit sector will "experience more credit problems in the coming months." He cited a range of pressures, including the lingering fallout from geopolitical tensions, persistently higher borrowing costs, and structural challenges within specific industries. Sectors such as software, which often relies on recurring revenue models and can be sensitive to economic downturns, are flagged as particularly vulnerable. Additionally, consumer-facing and healthcare borrowers, susceptible to shifts in economic sentiment and regulatory changes, may also face increasing strain on their balance sheets.
Beyond credit quality concerns, private credit funds are also contending with rising investor demand for liquidity. Many institutional investors, including pension funds and endowments, committed capital to private credit funds with long lock-up periods, typically ranging from 7 to 10 years. After years of illiquid investments, some clients are now seeking to rebalance their portfolios and access capital, putting pressure on fund managers to provide exits or manage redemption requests, which can be challenging given the inherently illiquid nature of many private credit assets.
Regulatory Tailwinds and the Shifting Playing Field
The tide for traditional banks is also being turned by prospective regulatory adjustments that could fundamentally alter the competitive playing field. A key focus is the Basel III "Endgame" framework, a comprehensive regulatory overhaul finalized in 2017 following the 2008 financial crisis. Designed to standardize how large banks calculate risk and establish a capital floor, Basel III mandated that lenders hold more reserves against loans, particularly those deemed higher-risk, such as corporate and leveraged lending. This framework significantly increased the cost of capital for banks engaging in such activities, making their lending less competitive compared to private credit funds.
However, over the medium term, there is a growing anticipation of deregulation, particularly from a potential Trump administration. "Our anticipation of deregulation from the Trump administration includes a likely weakening of the Basel III Endgame implementation, with the U.S. Treasury explicitly aims to redirect business lending back into the banking sector," explained Shannon Saccocia, chief investment officer at Neuberger Berman, in an email to CNBC. A weakening or outright reversal of key aspects of Basel III would substantially lower the capital costs for banks, allowing them to price loans more competitively and directly challenge private credit lenders. This sentiment is echoed by other market veterans who believe such changes are crucial for banks to regain their footing.
Further signaling a more favorable regulatory environment for traditional lenders, recent Federal Reserve proposals to adjust the regulatory capital framework could also "position banks to be more competitive on the lending front in hopes of regaining at least some share of their original commercial banking foothold," noted Marina Lukatsky, global head of credit and U.S. private equity at PitchBook. This proactive stance from regulators, coupled with improving funding conditions for traditional lenders, suggests a concerted effort to recalibrate the balance between regulated and unregulated financial institutions.
Evidence of a Bank Comeback
Initial indicators suggest that banks are already demonstrating a renewed appetite for large-scale leveraged finance. The recovery of banks’ share in buyout financings above $1 billion, from 39% in 2023 to just over 50% in 2025, according to PitchBook data, points to an early rebound. More concretely, recent multi-billion-dollar leveraged loan financings for major corporations like Electronic Arts and Sealed Air serve as compelling evidence of banks’ strong capacity and willingness to execute "jumbo" transactions when market conditions permit. These deals, often syndicated among a group of banks, showcase their ability to mobilize significant capital for large, complex transactions, a traditional strength that was somewhat eclipsed by private credit in recent years.
"Banks should quickly fill any void left by more cautious private credit lending," Zandi added, underscoring the potential for traditional lenders to step in as private credit firms become more selective or face liquidity challenges. This dynamic could lead to a more balanced market where banks reclaim their historical role in financing large corporate transactions, while private credit potentially focuses on middle-market deals or niche segments where their flexibility remains a key differentiator.
Private Credit’s Enduring Competitive Edge
Despite the emerging headwinds, it would be premature to declare private credit’s dominance broken. Direct lenders continue to compete aggressively, leveraging their structural advantages. Their ability to offer customized financing solutions, including the aforementioned unitranche loans that bundle different types of debt into a single package, often with a single interest rate, remains a powerful draw for many borrowers. This streamlined approach offers simplicity and often faster execution than navigating a complex syndicate of banks.
Recent large-scale transactions illustrate private credit’s continued potency. For instance, Blackstone and Ares, two titans of the private credit industry, were among 33 lenders that reportedly provided approximately $5 billion in financing to back investment firm Thoma Bravo’s acquisition of logistics company WWEX Group. This substantial financing package, a cov-lite unitranche deal, underscores the capacity of private credit firms to fund even the largest buyout deals, proving their enduring capability to compete directly with banks for significant mandates.
"Crucially, private credit retains structural advantages that are difficult for banks to replicate, including speed, certainty of execution and flexible conditions, which some borrowers may continue to value in volatile markets," noted several experts. These attributes are particularly appealing to private equity sponsors who prioritize deal certainty and swift closings, especially in fast-moving M&A environments.
Challenges for a Full Bank Comeback
For banks to cement a meaningful comeback, several broader economic and market conditions need to align. The expected rebound in buyouts and overall dealmaking activity has yet to fully materialize this year. Uncertainty surrounding global trade policy, the trajectory of interest rates, and geopolitical tensions have collectively contributed to a slower pace of mergers and acquisitions. With fewer deals taking place, the overall demand for financing has naturally declined, impacting both banks and private credit providers.
Marina Lukatsky of PitchBook emphasized that for banks to truly reclaim significant market share, the borrowing costs in syndicated loans—large loans arranged by banks and funded by a group of lenders—must become more competitive relative to private credit offerings. Furthermore, a sustained pickup in large buyout activity is essential, as this segment represents a traditional stronghold for banks. Finally, a general improvement in the broader economic outlook would provide the necessary tailwind for increased corporate investment and M&A, thereby boosting demand for all forms of leveraged finance.
Implications for the Broader Financial Ecosystem
The potential rebalancing of power in the leveraged finance market carries significant implications for various stakeholders. For borrowers, particularly private equity firms, increased competition between banks and private credit lenders could translate into more favorable terms, greater flexibility, and potentially lower costs of capital. This competitive dynamic could foster innovation in financing structures and improve overall market efficiency.
From a systemic risk perspective, a shift back towards bank-led leveraged lending might be viewed favorably by regulators. Traditional banks are subject to comprehensive regulatory oversight, capital requirements, and stress testing, which theoretically enhances the stability of the financial system. The growth of private credit, while providing essential financing, has also raised concerns about transparency and potential systemic risks stemming from a less regulated "shadow banking" sector. A more balanced market could mitigate some of these concerns.
Ultimately, the future of leveraged finance is unlikely to be a zero-sum game. Both traditional banks and private credit funds offer distinct advantages and cater to different borrower needs and market segments. As Jeffrey Hooke, a senior lecturer in finance at Johns Hopkins Carey Business School, aptly summarized, "The tug of war is just starting. The rules have been relaxed, so it’s only natural that banks want to get back some of their market share in private credit." This evolving landscape promises a more dynamic and competitive environment, with both established and emergent players vying for a slice of the lucrative, high-stakes world of corporate debt.