Bowman: Regulation shifts corporate lending to nonbanks, Fed responds

Federal Reserve Vice Chair Michelle Bowman highlighted a significant shift in corporate lending, with banks' share decreasing from 48 percent in 2015 to 29 percent in 2025.

This migration, primarily to the private credit market now valued at $1.4 trillion in the United States, stems from post-2008 financial crisis reforms.

While these reforms strengthened bank capital and liquidity, some requirements became disproportionately burdensome relative to risk.

This led banks to curtail certain corporate lending activities or increase credit costs for borrowers.

Bowman noted that current capital rules create a 'perverse incentive,' offering banks more favorable treatment for lending to private credit funds than for directly financing creditworthy corporations, thereby encouraging indirect intermediation rather than direct service to end-borrowers.

This dynamic has pushed a substantial portion of corporate lending outside the regulated banking system, creating a deficit between demand for banking services and banks' willingness to provide them.

Bowman detailed the diverse ecosystem of nondepository financial institutions (NDFIs), such as private credit funds and business development companies (BDCs).

These entities are deeply interconnected with the regulated banking sector through various loans, with bank lending to NDFIs significantly outpacing other categories.

Emerging risks include concerns about the quality of private credit loans following recent bankruptcies and exposures to AI-vulnerable industries.

Bowman noted a potential risk transmission channel through private credit funding withdrawals, leading to some fund redemptions.

Despite this, banks continue extending credit to BDCs, with these loans generally appearing well-collateralized.

However, the complex interconnections warrant close supervisory attention to prevent systemic risk.