Wall Street’s $95B Secret: Banks Now Fueling Their Own Competition

Traditional finance just can’t help itself—even when it’s cutting its own throat. New data reveals Wall Street banks jacked up lending to private credit rivals by a staggering 145%, hitting $95 billion. Talk about financing your own obsolescence.

Private credit’s eating their lunch, and banks are handing them the cash to do it. The ultimate ’if you can’t beat ’em, fund ’em’ strategy—until the regulators finally wake up.

What to Know:

• Bank exposure to private debt vehicles reached $95 billion by 2024, with domestic banks involved in 50% of business development company loans
• JPMorgan Chase leads as the largest arranger, while Blackstone, Ares Capital, and FS KKR rank among top borrowers
• Most lending comes through $79 billion in revolving credit lines, offering banks safer returns on highly secured loans

Wall Street’s Strategic Shift

The phenomenon represents a significant strategic pivot for traditional banks. US banks are essentially enabling their rivals’ rapid expansion while simultaneously competing for the same corporate lending clients.

Business development companies and other private debt vehicles have become major borrowers from traditional financial institutions. JPMorgan Chase emerged as the dominant lead arranger in this space. Major borrowers include business development companies affiliated with Blackstone, Ares Capital Corp., and FS KKR Capital Corp.

"Banks are facilitating the growth of private credit by lending to private credit funds," said David Scharfstein, a Harvard Business School finance professor. "They get better capital treatment on these highly secured loans and earn healthy returns."

Credit Line Dynamics Drive Growth

The bulk of this lending occurs through revolving credit facilities rather than direct loan participation. Banks hold approximately $79 billion in these revolving credit lines, providing them a buffer from the riskier underlying investments.

Private debt funds and business development companies have significantly increased their use of these credit facilities. Utilization volumes jumped 117% over the same five-year period, according to Federal Reserve data.

Banks have discovered a method to profit from private credit growth without directly participating in the riskier loan origination business. Most business development company credit ratings maintain investment-grade status. The underlying loans these companies make often finance Leveraged buyouts or support companies with higher risk profiles.

Blackstone Private Credit Fund maintains more than $16.9 billion in total debt. This includes a $5.1 billion revolving credit facility provided by a banking consortium. The fund’s debt-to-equity ratio stood at 0.72 times as of March 31.

Regulatory Advantages and Risk Management

Banks have found ways to minimize the capital impact of these lending relationships. Some institutions are structuring transactions to reduce regulatory capital requirements.

Japan’s Sumitomo Mitsui Banking Corp. sold bonds connected to at least $3 billion in credit lines extended to business development companies earlier this year. Apollo Global Management, Carlyle Group, and Ares Management purchased the transaction.

"Default probabilities of loans to BDCs are the smallest ones across almost all different credit ratings," Federal Reserve researchers noted. However, bank loans to private debt funds beyond business development companies show "higher default probabilities" compared to other non-bank financial institutions.

Most banks maintain strong protection through highly secured loan structures, according to Scharfstein. Business development companies typically offer substantial collateral backing for their credit facilities.

Emerging Risk Factors

The Federal Reserve identified several potential vulnerabilities in this growing relationship. Direct lending funds might be forced to draw down credit lines during market stress periods, creating pressure on bank lenders. The Federal Deposit Insurance Corporation published complementary analysis highlighting additional concerns. Competition between banks and private credit firms could lead both parties to loosen lending standards to attract clients, potentially weakening overall credit quality.

Private credit firms operate under different regulatory frameworks than traditional banks. Loans originated by private credit companies are not subject to the same quality metrics banks must follow. Banks lack easy methods to evaluate private credit firms’ lending decisions.

Business development companies face potential covenant pressures during market downturns. They may need to use existing cash or sell assets to reduce debt levels and maintain compliance with lending agreements.

Systemic Implications Unclear

Federal Reserve researchers acknowledged the difficulty in assessing long-term systemic risks. The interconnectedness between traditional banking and private credit markets lacks transparency.

"The lack of transparency and understanding of the interconnectedness between private credit and the rest of the financial system makes it difficult to assess the implications for systemic vulnerabilities," the Fed report stated.

Current market conditions suggest immediate risks appear limited. However, the rapid growth in bank-to-private credit lending relationships creates new dynamics in financial markets that regulators continue monitoring.

Recent transaction activity demonstrates the ongoing expansion of these relationships. A consortium of private credit lenders recently repriced a €4.5 billion unitranche loan backing the Adevinta buyout, increasing the facility size to €6.25 billion. Also, FC Internazionale Milano is exploring private debt markets to refinance high-yield bonds secured by sponsorship and media rights. Gaw Capital Partners provided a HK$300 million private financing to Hong Kong developer First Group Holdings.

Closing Thoughts

The 145% surge in bank lending to private credit funds represents a fundamental shift in Wall Street’s approach to the rapidly growing private debt market. While banks continue competing directly with these firms for corporate clients, they have simultaneously become their largest financial backers, creating new systemic relationships that regulators are still working to understand.