How banks fuel the private credit boom

Banks are central to the private credit boom because they provide funding, leverage, deal flow, and risk-transfer structures that allow private lenders to scale far beyond their own unlevered capital. Regulation has pushed banks to hold fewer risky loans directly, so they increasingly finance private credit funds and partner with them instead of competing head‑on.​

Key ways banks fuel private credit

• Credit lines and fund financing: Banks extend large revolving credit facilities and term loans to private credit funds, business development companies (BDCs), and other nonbank lenders, giving them leverage to originate more loans than their equity alone would support. Supervisory data suggest US banks have tens of billions in such lines and that lending to non‑depository financial institutions is one of the fastest‑growing segments on bank balance sheets.​

• Subscription and capital‑call facilities: Banks provide “subscription lines” backed by the uncalled commitments of the private fund’s investors, letting funds draw quickly to close deals and only later call equity from limited partners. This cheap, flexible bridge finance smooths cash flows for funds and effectively boosts their deployable capital and speed, making private credit more competitive with traditional syndicated loans.​

• Back leverage, repo, and NAV loans: Banks offer back‑leverage structures such as repo financing and net‑asset‑value (NAV) loans secured by portfolios of private credit assets. These structures allow funds to lever existing loans, enhancing returns and freeing up equity to originate yet more credit.​

Origination and risk transfer

• Originate‑to‑distribute models: Banks originate corporate loans using their client relationships, then sell portions or tranches of those loans to private credit funds or place them into joint securitizations. This lets banks keep senior, lower‑risk slices on their balance sheets while offloading riskier exposure to private vehicles, supporting more total lending than if banks had to hold the entire loan.​

• Co‑lending and hybrid structures: In many deals, banks provide revolving facilities or senior secured tranches, while private credit funds provide junior, mezzanine, or term pieces. These partnerships blend bank funding costs and regulatory advantages with private credit’s flexibility and higher‑yield capital, expanding credit availability to borrowers that might not qualify for full bank financing.​

Regulatory and macro drivers

• Capital and liquidity rules: Post‑crisis capital and liquidity requirements make it more expensive for banks to hold certain leveraged or illiquid loans, particularly to riskier borrowers. By instead financing private credit vehicles via facilities that attract different risk weights and by selling down exposures, banks can support similar borrowers while optimizing regulatory ratios.​

• Bank retrenchment and demand shift: Episodes like the regional banking stress in 2023 led banks to pull back from some middle‑market and leveraged lending, opening space that private credit funds quickly filled. As borrowers and investors have grown comfortable with this model, a reinforcing cycle has emerged in which banks focus on wholesale support (funding, structuring, distribution) while private credit takes on more direct lending.​

Risks and systemic implications

• Growing interconnectedness: The rise of bank credit to private funds—estimated in the hundreds of billions of dollars in loans and committed lines—creates tighter links between the regulated banking system and relatively less‑regulated private credit. Stress at private funds could transmit back to banks through drawdowns on facilities, mark‑to‑market pressure on pledged collateral, or reputational and liquidity strains.​

• Policy concerns: Central banks and regulators increasingly flag private credit’s growth as a potential financial‑stability issue, precisely because banks’ funding and partnerships help the sector scale rapidly. Authorities are studying whether this represents regulatory arbitrage and how it might affect credit cycles and the transmission of monetary policy.​