Banks Reclaim Ground Over Private Credit in 2025: Deregulation, Risk & Margin Shifts

Banks ceded ground during regulatory strictures post-2008 and especially after the disruptions of 2022 when private credit seized the opportunity left by constrained banks. But throughout 2025, that dynamic has flipped. Deregulation under the current administration, along with regulatory relief, has afforded banks renewed freedoms in capital deployment. At the same time, private credit faces structural headwinds: yields are falling, deal terms are loosening, and risks—hidden leverage, weaker covenants, and payment-in-kind (PIK) features—are rising sharply [2][3][4].

Margin Pressure and Competitive Pricing: The spread premium that private credit once enjoyed is shrinking. Wells Fargo data show median spreads on private loans are now below 500 basis points globally, down from roughly 650 bp in early 2023. In some recent deals, spreads have dropped to mid-400 bp or lower, especially in Europe and for larger borrowers. Banks, particularly via broadly syndicated loans (BSLs), are offering even tighter pricing—low to mid-300 bp—for strong credits [3][4][5].

Regulatory Rollbacks & Bank Strength: Banks benefited from recent rollbacks of post-2008 leverage guidance and stress-test and capital rules, enabling more aggressive underwriting and entry into leveraged financings they had avoided. The result: banks underwrote large buyouts and syndicated large financings that in past years might have gone to private credit [1][2].

Risk Accumulation in Private Credit: Private credit is increasingly offering looser protections. Covenant-lite terms, larger PIK components, and complex capital structures are now more common. Moody’s flagged these developments, warning that they could lead to lower recoveries in distress, higher refinancing risk, and also systemic exposure due to co-lending with banks and bank-financed credit lines [4]. Defaults are modest so far but creeping: nonaccruals rising, NAVs dropping, credit performance weakening among BDCs especially, e.g., Goldman Sachs BDC is ranked near the bottom of its peer group [2].

Emerging Private Credit Tactics: To stay relevant, private lenders are moving into less-regulated spaces—consumer credit (credit cards, BNPL), unsecured loans, and increasing forward-flow purchases of credit. Some intend to grow via PE acquisitions to scale up [2]. But these moves expose them to greater risk with less structural protection, especially in economic downturns when unsecured credit and liquidity pressures tend to worsen.

Strategic Implications: For banks, the environment is favorable—the return of syndicated finance, stronger deal pipelines, and capital relief enhance opportunities in leveraged buyouts, acquisition financing and middle-market deals. Private credit firms must balance deployment urgency with maintaining protective terms to avoid erosion. Limited partners (LPs) should scrutinize deal documentation, liquidity terms, and the health of portfolios. Regulatory agencies may soon revisit nonbank exposures, especially where risk transfer and contagion channels are opaque.

Open Questions: Can banks sustain aggressive risk taking without inflaming underwriting failings? Will private credit firms retrench to stricter terms, or will competitive pressure force further weakening? How much of private credit’s risk exposure is truly hidden in these novel financing structures and consumer sectors? And will regulatory shifts inevitably prompt a reimposition of constraints if stress or losses mount?