Wall Street Banks Eye a Comeback as Private Credit Faces Headwinds
For over a decade, private credit lenders—often called direct lenders—have been the dominant force in financing large leveraged buyouts, capitalizing on a retreat by traditional banks. Now, a confluence of factors, from easing regulations to signs of strain in the private credit sector itself, suggests that dynamic may be shifting. Wall Street banks, long on the sidelines, are positioning themselves to reclaim a significant slice of the lucrative market.
“This is an opportune time for banks to regain market share from private credit funds,” said Mark Zandi, Chief Economist at Moody’s. “Interest rates have declined and banking regulation has eased. Private credit lenders are also struggling with the fallout from their previously aggressive lending.”
The Great Shift: How Private Credit Rose
The rise of private credit was a direct response to bank pullbacks. Following the Federal Reserve’s aggressive rate-hiking cycle and the 2023 regional banking crisis, traditional lenders tightened underwriting standards and steered clear of riskier, highly leveraged deals. Private equity firms and other borrowers, seeking faster execution and more flexible terms, flocked to direct lenders. The result was a dramatic market share transfer.
According to PitchBook data, banks’ share of financing for buyouts exceeding $1 billion plummeted to just 39% in 2023, down from approximately 80% in the preceding five years. While that share has modestly recovered to just over 50% in 2025, the momentum may now be turning further in banks’ favor.
Private Credit’s Growing Pains
The very strategy that fueled private credit’s growth—aggressive lending in a low-rate environment—is now creating vulnerabilities. Higher interest rates are straining the highly indebted borrowers these funds financed, elevating default risks. “Moody’s expects the sector to experience more credit problems in the coming months,” Zandi noted, citing fallout from geopolitical tensions, elevated borrowing costs, and sector-specific pressures in industries like software. Consumer and healthcare borrowers are also seen as potential flashpoints.
Beyond credit quality, the business model faces a liquidity test. After years of locking up investor capital for extended periods, some clients are seeking to redeem their investments, creating redemption pressure on funds that hold illiquid loans.
Regulatory Tailwinds for Banks
Perhaps the most significant potential catalyst for a bank resurgence is regulatory policy. The Basel III “Endgame” framework—a post-2008 crisis overhaul finalized in 2017—has historically made bank lending less competitive by requiring them to hold more capital against risky loans, including leveraged lending.
There is a growing anticipation of deregulatory momentum. “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.
Jeffrey Hooke, a Senior Lecturer in Finance at Johns Hopkins Carey Business School, frames it simply: “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.” Recent Federal Reserve proposals to adjust regulatory capital rules could further “position banks to be more competitive on the lending front,” noted Marina Lukatsky, PitchBook’s Global Head of Credit and U.S. Private Equity.
Signs of this renewed appetite are already visible. Banks recently arranged multi-billion-dollar leveraged loan financings for giants like Electronic Arts and Sealed Air, demonstrating their capacity to execute large, “jumbo” transactions when conditions allow.
Why Private Credit Isn’t on the Ropes Yet
Despite the challenges, private credit remains a formidable competitor. Its core structural advantages—speed, certainty of execution, and flexible, “unitranche” financing that bundles multiple debt layers—are hard for banks to match, especially in volatile markets where borrowers prioritize deal certainty.
Recent mega-deals underscore this resilience. For instance, a consortium of 33 lenders, led by private credit giants like Blackstone and Ares, provided approximately $5 billion to back Thoma Bravo’s acquisition of logistics company WWEX Group. This shows private credit can still marshal vast capital for headline-grabbing deals even as banks test the waters.
Furthermore, the overall deal pipeline has been soft. Lukatsky points out that the expected rebound in buyout activity has not materialized in 2025 due to uncertainty around trade policy, interest rates, and geopolitics. With fewer deals overall, financing demand is down for everyone.
For a full-scale bank comeback, several conditions need to align. Lukatsky specifies that “borrowing costs in syndicated loans need to become more competitive,” large buyout activity must pick up, and the broader economic outlook requires improvement.
The Bottom Line: A Tug-of-War, Not a Rout
The narrative is not one of private credit’s imminent collapse but of a rebalancing act. Banks are leveraging a more favorable regulatory environment and their balance sheet strength to re-enter a space they once dominated. However, private credit’s operational agility and established relationships with private equity sponsors provide a durable moat.
As Hooke succinctly stated, “The tug of war is just starting.” The next chapter in corporate finance will be defined by how these two capital sources—the regulated, balance-sheet-driven banks and the agile, investor-funded private credit funds—navigate an evolving landscape of interest rates, regulation, and credit cycles. The winner, ultimately, may be the borrower who can choose the best terms from a more competitive field.
