The Capital Rule That Pays Banks to Lend to Lenders

What's New

Under current United States capital rules, a bank that lends to a private credit fund can hold materially less capital than the same bank lending directly to that fund's borrower. A White & Case alert on the migration of corporate lending from banks to private credit traces how this inversion arose and why the regulatory fix now in front of the agencies may not close it. Most corporate exposures carry a flat 100 percent risk weight with no reduction for borrower credit quality, while a bank facility to a private credit fund or business development company can in some cases be structured as a securitisation exposure, where the simplified supervisory formula sets a risk weight floor of 20 percent. The result is that the regulated sector has substituted financing intermediaries for financing end borrowers, which is close to the opposite of the post crisis intent. The March 2026 Basel III proposal would narrow the gap on the corporate side, but the same proposal would also lower the securitisation floor, leaving the relative incentive largely intact.

Why It Matters

This is the supply side mechanism behind a decade of market share transfer, and it is far more specific than the usual account about banks retrenching. Regulation did not simply make lending expensive, it made lending to lenders cheap, which is a different thing with different consequences. The practical effect is that bank credit risk did not leave the system, it changed shape from observable loan exposure into counterparty exposure to entities regulators cannot see inside. Bowman has said plainly that losses pushed outside the perimeter tend to be transmitted back through exactly these channels. For managers, the durability of bank facility pricing depends on rules currently in flux; for platforms, the emerging supervisory demand is for granular NDFI exposure data that banks do not presently produce.

Big Picture Drivers

• A risk weight cliff with no credit sensitivity: A loan to an investment grade corporate and a loan to a weak one both attract 100 percent today, which removes any capital reward for underwriting quality on the bank side.

• Securitisation treatment as the arbitrage: Structuring a fund facility as a securitisation exposure drops the floor to 20 percent. The capital saving comes from the wrapper, not from any reduction in underlying credit risk.

• The leveraged lending guidance overhang: The 2013 guidance flagged leverage above six times total debt to EBITDA as a concern, and examiners treated what was formally nonbinding guidance as a bright line. Banks withdrew from the segment rather than absorb examination criticism.

• Withdrawal without recapture: The OCC and FDIC formally exited the guidance in December 2025, conceding it had pushed leveraged lending outside the perimeter. Whether banks can retake share from incumbent nonbank lenders is a separate and unanswered question.

• Genuine nonregulatory advantages: Speed of origination, no syndication or ratings requirement, no market flex, delayed draw features, payment in kind flexibility and single lender renegotiation are real borrower preferences that survive any capital reform.

• A reporting taxonomy that hides the exposure: The industry code covering other financial vehicles lumps hedge funds, private equity, private credit funds, BDCs, special purpose entities and asset backed issuers together, which makes concentration and interconnectedness unmeasurable.

By The Numbers

• 48 percent to 29 percent: The bank share of United States corporate lending between 2015 and 2025, per Bowman, with private credit a principal driver of the shift.

• 100 percent versus 20 percent: The current risk weight on a general corporate exposure against the securitisation floor available on a structured facility to a fund or BDC.

• 65 percent: The proposed minimum risk weight for an investment grade corporate obligor under the expanded risk based approach, alongside a cut from 100 percent to 95 percent in the standardized approach.

• 20 percent to 15 percent: The proposed reduction in the securitisation risk weight floor, which is why the reform may preserve rather than remove the incentive to lend to intermediaries.

• 400 basis points versus 200: Typical BDC loan spreads against the spreads at which large banks write most of their lending, a gap that reflects genuine segmentation of the borrower base.

• Six times: The total debt to EBITDA level the withdrawn guidance flagged, and a level now seen with some regularity in nonbank originated credit.

Key Trends to Watch

• Whether the Federal Reserve follows the OCC and FDIC: The Fed has not formally withdrawn from the leveraged lending guidance, though its practical force as anything more than supervisory commentary is already questionable.

• Granular NDFI reporting: Bowman has committed the Board to requiring the largest banks to report total assets, net income and leverage for the nondepository institutions they finance. That is a new and non trivial data assembly problem for the reporting banks.

• Ad hoc supervisory inquiry becoming routine: The Fed reportedly canvassed major banks on private credit exposure in April 2026 after a redemption surge. Episodic requests of that kind tend to harden into standing requirements.

• The subinvestment grade segment stays put: Because private credit loans are typically unrated or below investment grade with higher leverage, the proposed relief targets a borrower profile that largely was not the one that migrated.

• Political durability through 2028: The alert flags explicitly that agency leadership and posture could change with the next administration, which makes any capital reform a medium term rather than settled variable.

The Wrap

The core finding is that the perimeter did not contain risk, it relocated it and made it harder to observe. Banks now hold concentrated counterparty exposure to a set of vehicles whose own asset quality they report on through an industry code so broad it is analytically useless. The proposed capital changes address the pricing of that distortion while leaving the arbitrage that created it partly in place. The binding constraint that emerges is measurement rather than capital: supervisors are asking banks to characterise the credit quality of nonbank borrowers whose portfolios sit in filings nobody has systematically assembled. Position level visibility into BDC and private credit portfolios is about to stop being a competitive nicety for lenders and start being a regulatory reporting dependency.