Private credit crisis looming, Wall Street investment banks take the opportunity to counterattack, a funding battle is about to begin!

The cracks in the private credit market are opening a long-awaited window for traditional banks to launch a counteroffensive.

On March 27, according to CNBC, as private credit firms gradually revealed risks after aggressive lending, and with the regulatory environment trending toward easing, the conditions for Wall Street banks to reclaim market share in the corporate financing market are quietly coming together. Moody’s chief economist Mark Zandi said, “For banks, this is a favorable time to wrest back market share from private credit funds.”

Bank rebounds are already showing early signs. According to PitchBook data, banks’ share in leveraged buyout financing of $1 billion or more had fallen to 39% in 2023, down sharply from roughly 80% in the prior five years; and that figure has since rebounded to over 50% by 2025. Recent corporate leveraged loan financings—such as those involving Electronic Arts and Sealed Air—further indicate that when conditions allow, banks’ willingness to compete for large deals has clearly increased.

However, private credit has not laid down its arms. Institutions such as Blackstone and Ares participated in a financing transaction of roughly $5 billion, providing funding for the acquisition by investment firm Thoma Bravo of WWEX Group, a supply chain company, indicating that direct lenders still have the capability to drive large-scale M&A.

Marina Lukatsky, head of global credit and U.S. private equity at PitchBook, noted that dragged down by uncertainty in trade policy, interest rates, and geopolitics, the M&A recovery the market has been expecting has not yet materialized this year, and overall financing demand is under pressure. Jeffrey Hooke, a senior lecturer in finance at the Johns Hopkins University Carey Business School, characterized this competition as a “tug-of-war that has just begun.”

Cracks in private credit are starting to show, and the aftereffects of aggressive lending are taking hold

The rise of private credit has, to a considerable extent, been driven by banks voluntarily stepping back. After the Fed’s aggressive rate hikes and the 2023 U.S. banking crisis, traditional banks tightened lending standards and shied away from high-risk deals, prompting borrowers—especially private equity firms—to turn in large numbers to direct lending institutions with faster execution and more flexible terms.

Now, this setup is facing reversal pressure. Years of accumulated aggressive lending are beginning to boomerang: in a high-interest-rate environment, borrowers burdened by debt have seen weaker repayment capacity, and default risk has risen. At the same time, investors’ liquidity needs are intensifying, and some clients are seeking redemptions after locking up funds for the long term.

Mark Zandi expects that in the coming months, the private credit industry will see “more credit problems,” with triggers ranging from geopolitical tensions and elevated borrowing costs to structural pressures affecting industries such as software; borrowers in the consumer and healthcare sectors may also face the impact.

Easing regulation provides a tailwind, and adjustments to capital rules favor traditional banks

Over the medium term, changes on the regulatory front are expected to further tilt in favor of banks. Shannon Saccocia, chief investment officer at Neuberger Berman, said the Trump administration’s deregulatory expectations include potentially weakening the enforcement of the Basel III final framework; “The U.S. Treasury has explicitly made bringing corporate lending back into the banking system a policy goal.”

The Basel III final framework was developed in 2017 as part of regulatory reforms following the 2008 global financial crisis. It aims to standardize risk-measurement standards for large banks and requires banks to hold more capital for corporate loans, especially high-risk leveraged loans. Multiple market participants say that in recent years, this framework has weakened banks’ competitiveness relative to private credit funds.

Saccocia said if the Basel III final framework is weakened or reversed, it would create competitive pressure for private credit institutions. Marina Lukatsky also noted that the capital-regulatory framework adjustment proposal recently put forward by the Federal Reserve is expected to “make banks more competitive on the lending end, with the goal of regaining some of the market positions that commercial banks previously held.” Mark Zandi meanwhile said that a more lenient regulatory environment and improved financing conditions will support banks in rapidly filling the space left behind as private credit shifts toward conservatism.

Private credit’s structural advantages remain, but there are still obstacles on the road to bank recovery

Despite rising pressures, private credit’s core competitiveness has not disappeared. Direct lenders continue to proactively go after deals with “unitranche loans,” which package different types of debt into a single blended rate; by leveraging structural advantages such as strong execution certainty, fast closing speed, and flexible terms, they still hold appeal for certain borrowers during periods of market volatility.

Marina Lukatsky said that for banks to achieve a rebound with real substance, they must satisfy multiple conditions at once: the borrowing cost of syndicated loans must become more competitive, major leveraged buyout activity must clearly rebound, and the outlook for the macroeconomy must also improve. The current sluggish state of the M&A market means that financing needs for both banks and private credit are shrinking, narrowing the space for competition between the two.

Jeffrey Hooke takes a pragmatic view of how the competitive landscape is evolving: “With the rules loosened, it’s only natural that banks would want to reclaim market share in the private credit space.” But he also emphasized that the game is far from decided—“the tug-of-war is just beginning.”