In recent years, private credit lending by nonbank entities has grown rapidly and now rivals the size of traditional bank commercial and industrial (C&I) loans and corporate bonds. This expansion has changed the landscape for business financing, raising questions about whether banks and private credit funds are competitors or partners.
Banks have started to lend more to private credit funds, which then provide loans to businesses. The profitability of this approach compared to direct C&I lending is a key consideration for banks. According to an analysis using bank supervisory data at the loan level, banks earn a 7.9 percent return on equity from C&I lending, while loans to private credit funds yield a much higher 29.2 percent return on equity.
The analysis attributes this difference mainly to balance sheet costs. Loans to private credit funds require only a 20 percent risk weight under capital requirements, compared with 100 percent for C&I loans, making them less costly for banks to hold. Additionally, data show that the average predicted default rate is lower for loans to private credit funds (0.2 percent) than for C&I loans (1 percent), and recovery rates are slightly higher as well.
“Chart 1 shows that, on average, banks generate a 7.9 percent return on equity from C&I lending (purple bars) compared with a 29.2 percent return on loans to private credit funds (blue bars). Taken at face value, these results suggest that indirect lending through private credit funds is much more profitable for banks than direct C&I lending. This finding is consistent with other types of bank lending. For example, in the U.S. mortgage market, banks often find it more profitable to indirectly fund mortgage loans through warehouse lending to nonbank originators or through the purchase of mortgage-backed securities (MBS).”
A closer look at loan characteristics reveals that private credit funds typically make riskier loans than those found in standard bank portfolios. They lend into markets with higher spreads and greater loss given default—indicating they serve borrowers who may not be able to access traditional bank financing.
“The data suggest that private credit funds are lending into markets with much higher credit risk, as indicated by higher loan spreads and higher loss given default. In other words, bank lending to private funds is a fundamentally different form of business lending, where banks are not competing for their usual loan customers but rather reaching a new set of higher-risk customers through indirect lending to private credit funds.”
This arrangement means that while both types of lenders provide funding to businesses, they do not generally compete for the same clients; instead, their activities tend to complement each other.
“All in all, this analysis shows that the growth of the private credit industry has offered banks a new, profitable form of indirect lending, positioning the two lenders more as partners than competitors. While private credit funds and banks both lend to businesses, loan pricing suggests that they do not directly compete for the same set of borrowers; instead, bank lending complements private credit lending.”
However, there are signs this dynamic could shift in the future as some evidence suggests that private credit lenders are beginning to target larger and investment-grade companies—markets traditionally served by banks and corporate bond issuers—which could increase competition between these sectors.
The article’s findings draw from sources including data from the Board of Governors of the Federal Reserve System and studies such as “Bank Lending to Private Credit: Size, Characteristics, and Financial Stability Implications” published by federal regulators (https://www.federalreserve.gov/econres/notes/feds-notes/bank-lending-to-private-credit-size-characteristics-and-financial-stability-implications-20250523.html), along with research examining how capital requirements influence returns on different types of loans (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4703505).
Jordan Pandolfo authored this analysis as an economist at the Federal Reserve Bank of Kansas City but noted: “The views expressed are those of the author and do not reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.”
