Federal Reserve Vice Chair for SupervisionMichelle Bowman said the central bank’s own capital rules sent corporate lending from regulated banks into the $1.4 trillion private credit market, flagging a regulatory shift designed to bring some of that activity back.?
The bank share of corporate lending decreased to 29% in 2025 from 48% in 2015, Bowman said on May 8 at the Hoover Institution’s annual Monetary Policy Conference at Stanford University.
Basel III framework and non-banking current environment
The private credit market is about $1.4 trillion, about the size of the high-yield bond and leveraged loan markets, but accounts for about 10% of total US corporate borrowing.
Bowman’s words about the private credit market are a direct acknowledgment by a sitting Fed governor of post-2008 bank capital rules, which were designed to safeguard the banking system after the financial crisis.
However, it was those very rules that produced unintended consequences, making it more costly for banks to lend directly to corporate borrowers.
As a result, Bowman said, “current capital rules create a perverse incentive,” in that banks receive favorable treatment from regulatory entities to lend to private credit funds rather than to creditworthy corporations directly.
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Recalibration of Basel III framework
Under the recalibrated Basel III framework, the risk weight on loans to investment-grade corporate borrowers would drop from 100% to 65%, narrowing the gap between bank loans to companies and bank loans to nonbank financial intermediaries.
She mentioned the change is not meant to push private credit out of the market, but rather to level the playing field.
Bowman flagged the growing risks in the non-banking sector, including recent bankruptcies that imposed losses on banks and private credit lenders, and concerns about software-sector exposure tied to artificial-intelligence disruption, which have compounded the worries.
Stress signals in the BDC market
According to the February Fitch Ratings report, redemptions at perpetually non-traded BDCs increased to a 4.5% average net asset value in Q4 of 2025, which was up 1.6% in the third quarter.
Software-sector exposure has been a key fire starter. Blue Owl Technology Income Corp focuses on software and tech-related companies and reported 15.4% redemptions in Q4 2025, with a net outflow of $394 million. In the same period, North Haven Private Income Fund saw $123 million in outflows. Fitch’s 2026 sector outlook for BDCs is “deteriorating.”
Related: SaaS-pocalypse stresses $3 trillion private credit market
The Fed Board will alter regulatory reporting requirements so banks need to report financial information, such as net income, total assets, and leverage, for the nonbank financial entities they lend to.
Bowman said the current industry classification includes private equity, private credit, hedge funds, BDCs, and asset-backed issuers in the “Other Financial Vehicles” category, which is broader and more useful for measuring interconnection and concentration risk.
Her words come as the private credit market faces its most-watched and scrutinized stretch since the COVID-19 era.
The worst-case private credit default forecast is 15% if AI-driven disruption hits corporate borrowers harder than expected, according to UBS Strategists in February,
The next Federal Open Market Committee meeting is in June, and Kevin Warsh’s confirmation as Fed Chair is set for May 15.
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