Why Loans Are Moving From Banks To Private Credit

Over the past decade, a quiet but significant transformation has occurred in lending. Loans are increasingly being originated, structured, and funded by private capital. This shift isn’t accidental, but the result of regulations that constrain banks’ ability to lend, combined with the rise of flexible, yield-seeking private creditors who fill the gap.

This transition reflects a simple imbalance: demand for credit remains strong while the ability of regulated institutions to supply credit has weakened. Capital, as it always does, has adapted, flowing to channels that are faster and often less visible.

Following the 2008 financial crisis, policymakers enacted sweeping reforms to stabilize the financial system. In the U.S. this included the Dodd-Frank bill, alongside international frameworks such as Basel III. The reforms imposed stricter capital requirements, liquidity constraints, and oversight mechanisms designed to reduce risk.

Prior to these reforms, large banks might have operated with Tier 1 capital ratios of 6–8%, meaning that for every $100 of capital that could be deemed risky, the bank had to keep $6-8 of safe reserves. Today, many are required to maintain ratios of 10–13%, due to requirements such as the Liquidity Coverage Ratio and Net Stable Funding Ratio. Additional buffers exist for large, systemically important banks. Loans tied to real estate and construction are considered riskier, further discouraging originations for those sectors.

Compliance has also become more complex. Loan origination now involves extensive regulatory checks from the Federal Reserve, the Federal Deposit Insurance Corporation, and other bureaucracies. This is designed to ensure bank stability following the collapses during the Great Recession, but it slows down approvals from weeks to months.

This creates friction for borrowers, namely in fast-moving industries. Financing may exist in theory, but in practice is often too slow or with too rigid of terms.

Following the new regulatory regime, total bank loan volume dropped for several years after 2008. It has bounced back since, but an alternative has also entered to address the problems described above: private credit.

This is a broad category of non-bank lenders, including private equity firms such as Apollo Global Management and Blackstone; smaller direct lending funds; family offices; insurance companies; and hedge funds.

They operate under a fundamentally different model. Because they do not take banking customer deposits, they do not have nearly as frequent of redemption requests, and thus fewer capital and liquidity requirements. They raise capital from institutional investors—pensions, endowments, sovereign wealth funds—and deploy it with flexibility.

Private lenders can underwrite deals on a case-by-case basis, structure terms, and close quickly, without adhering to the standard risk-weighting formulas of banks. The risks that they do factor are priced directly into the loans themselves.

This flexibility comes at a cost. Borrowers typically pay interest rates that are multiple percentage points higher than comparable bank loans. But loanees tolerate this if it means borrowing money at greater speed or customization—or if traditional banks have shut them out altogether. 

The growth of this sector has been dramatic. Private credit as an asset class grew from under $1 billion in the early 2000s to over $2.5 trillion today, and in 10 years has nearly tripled as a share of certain loan categories. Private credit now finances between 70-80% of leveraged buyouts of companies.

This is nothing close to a total displacement of banks. The system is evolving into a hybrid where banks act as intermediaries—originating loans and then syndicating them through private channels, or bringing on private lenders to supply mezzanine debt. 

Beyond institutional private credit lies a less visible category: informal, relationship-based lending. This “under the table” market is difficult to quantify but is prevalent, namely among entrepreneurs, real estate developers, home flippers and more.

These arrangements are attractive precisely because they bypass the friction of traditional finance. A developer might secure funding over a phone call rather than having to upload reams of financial papers and wait for an underwriting review.

However, this carries risk. Documentation may be minimal, pricing opaque, and enforcement more complex in the event of disputes. Yet despite these drawbacks, informal lending exists because it fulfills a need that regulated systems don’t satisfy.

The migration of lending activity away from banks and into these formal and informal private sources raises an important question: have post-crisis regulations achieved their intended goals?

Banks themselves have become more stable, with higher capital buffers and fewer failures since the 2008 levels. But stability within the banking system hasn’t eliminated risk from the broader financial ecosystem—it just redistributed it by pushing lending into systems that have less oversight. All the same, it has increased borrowing costs for those who still want to go the banking route, since all these compliance costs get passed onto customers. 

This pattern of course extends beyond finance. Regulations can be expected—as predictably as the law of gravity—to increase consumer costs, lengthen wait times, and push activity into the informal sector. This has long been evident in housing, transportation, and the various professions subject to licensure. Whether or not a given regulation is “worth” these nuisances depends on one’s perspective and priorities.

But in lending, the consequences have been clear: credit did not disappear, but merely adapted into new cottage industries. As long as regulatory constraints remain, Americans can expect, for better or worse, to see lending further branch out into private credit. 

Cover Image Attribution: Dietmar Rabich / Wikimedia Commons / “New York City (New York, USA), Wall Street — 2012 — 6614” / CC BY-SA 4.0