Private credit took over the leveraged loan market while big banks were stuck on the sidelines. Now the banks are sliding back in, and the handoff that started after the 2023 banking crisis is starting to flip.
What changed: the rulebook eased, and private credit started showing cracks.
Banks pulled back from riskier corporate lending after the regional bank failures in 2023 and the Fed's rate-hike cycle, which created the opening private credit funds needed.
Direct lenders now write somewhere between seven and eight out of every ten dollars of leveraged buyout financing, and the asset class itself has scaled from under $1 billion two decades ago to past the $2.5 trillion mark today.
Two things are tilting that balance. First, U.S. regulators softened the Basel III Endgame proposal, easing the capital rules banks would have faced. Second, private credit is dealing with its first real test in a higher-rate world.
Banks bring tools direct lenders cannot match, including deeper balance sheets, syndication networks, M&A advisory ties, and pricing that can undercut a private credit lender when conditions allow. We cover the moves Wall Street is making in Market Briefs every weekday, and you'll also get a free 45-minute investing masterclass when you join.
The default story tells most of it, with the U.S. private credit default rate hitting 5.8% over the 12 months through January 2026, per Fitch Ratings. That's the highest reading since Fitch started tracking it.
A lot of that stress is hidden, since many borrowers are paying their interest in fresh debt instead of cash, a trick called payment-in-kind, or PIK, which basically pushes a missed cash payment onto the loan balance. Roughly four in ten private credit borrowers now burn more cash than they generate.
The fund side has its own problems, with major firms like BlackRock, Apollo, Blue Owl, Ares, and Cliffwater hitting redemption caps in semi-liquid funds and some investors getting back well under a quarter of what they asked for. That's a slow-motion run, not a crash.
Big banks have noticed, since easing rules and weaker private competitors are a window many of them have not had since 2022.
Borrowers feel the shift too, with more buyout sponsors testing both bank and private bids on the same deal to drive pricing down. Risk officers across the industry are also watching the AI build-out, where data-center and chip financings have pulled in private credit at a pace that mirrors past tech booms.
Three signposts: where the final Basel III rules land, whether private credit default rates keep climbing past 6%, and how often banks underprice direct lenders on big buyout financings.
Watch the borrower side too, since a wave of late-2025 bankruptcies and tighter retail flows into private credit funds are part of the same story. The tug of war between Wall Street and direct lenders is just getting started.
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