Bowman warns Fed capital rules shifted corporate lending into private credit

The Federal Reserve’s top supervision official said post-2008 bank capital rules created a “perverse incentive” that pushed corporate borrowing out of regulated banks and into the $1.4 trillion private credit market, and outlined a regulatory recalibration to bring some of that activity back.

Michelle Bowman, the Fed’s vice chair for supervision, told the Hoover Institution’s Monetary Policy Conference at Stanford University on 8 May that the bank share of corporate lending had fallen to 29 per cent in 2025 from 48 per cent in 2015, a decline she attributed directly to the capital framework erected after the financial crisis.

“Current capital rules create a perverse incentive,” Bowman said, under which banks receive more favourable regulatory treatment for lending to private credit funds than for extending loans directly to creditworthy corporations.

The remarks are the most direct acknowledgment by a sitting Fed governor that post-crisis rules designed to safeguard the banking system after 2008 reshaped the structure of US corporate lending in ways regulators did not intend.

In 2015, regulated banks supplied nearly half of all corporate credit in the United States. A decade later, that share has shrunk to less than a third, with private credit funds, business development companies, and other nonbank lenders filling the gap.

The Basel III recalibration

Under the recalibrated Basel III framework now being advanced by the Fed, the risk weight on loans to investment-grade corporate borrowers would drop from 100 per cent to 65 per cent. The change narrows the gap between bank loans to operating companies and bank loans to nonbank financial intermediaries, which currently carry a lower risk weight and require less capital to be held against them.

Bowman said the change was not designed to push private credit out of the market but to “level the playing field” between regulated banks and the private credit sector. Private credit now accounts for roughly 10 per cent of total US corporate borrowing, a market roughly equivalent in size to the combined high-yield bond and leveraged loan markets.

The recalibration is part of a broader rethink of the Basel III endgame rules, which have been subject to intense lobbying from both Wall Street banks and private credit industry groups. Large banks have argued the original proposal was too punitive, while private credit managers have warned that abrupt regulatory changes could destabilise a market that has grown rapidly and with limited oversight.

Stress signals in the BDC market

The intervention comes as the private credit market faces its most scrutinised stretch since the pandemic era. Redemptions at perpetually non-traded business development companies, a bellwether for investor sentiment, rose to 4.5 per cent of average net asset value in the fourth quarter of 2025, up from 1.6 per cent in the third quarter, according to a February Fitch Ratings report.

Software-sector exposure has been a particular flashpoint. Blue Owl Technology Income Corp, which focuses on software and technology-related companies, reported 15.4 per cent redemptions in the fourth quarter, representing a net outflow of $394 million. North Haven Private Income Fund saw $123 million in outflows over the same period.

Fitch’s 2026 sector outlook for BDCs is “deteriorating”, the ratings agency said. The stress is concentrated in funds with heavy exposure to software companies, where the adoption of artificial intelligence is disrupting legacy business models and putting pressure on borrower cash flows.

Bowman also flagged broader vulnerabilities in the nonbank sector, including recent bankruptcies that imposed losses on both banks and private credit lenders.

UBS strategists said in February that the worst-case private credit default rate could reach 15 per cent if AI-driven disruption hits corporate borrowers harder than expected. The forecast, while a tail-risk scenario, points to the sensitivity of the private credit market to a technology shock that is already reshaping corporate balance sheets.

New reporting requirements

The Fed Board will amend regulatory reporting requirements so that banks must disclose financial information, including net income, total assets, and leverage, for the nonbank financial entities to which they lend.

Bowman said the current industry classification system lumps private equity, private credit, hedge funds, BDCs, and asset-backed issuers into a single “Other Financial Vehicles” category, a grouping too broad to measure interconnection and concentration risk across the financial system.

The new reporting rules are designed to give regulators a clearer picture of how much exposure regulated banks have to the shadow banking sector, and to identify concentrations that could amplify stress across the financial system. The Fed’s most recent financial stability report, published in early May, separately flagged rising risks in nonbank financial intermediation.

What comes next

The Basel III recalibration has not yet been finalised. Bowman’s remarks signal it is a priority for the supervision vice chair, but the timing of any board vote remains unclear.

Her speech lands in a politically sensitive window for the central bank. The next Federal Open Market Committee meeting is scheduled for June, and the Senate is set to vote on Kevin Warsh’s confirmation as Fed chair on 15 May. Warsh, if confirmed, would succeed Jerome Powell and inherit both the Basel recalibration and the post-crisis regulatory reform agenda.

Bowman’s acknowledgment of the unintended consequences of post-2008 capital rules may also shape the confirmation debate. Senate Banking Committee members have previously pressed Fed nominees on whether capital requirements strike the right balance between financial stability and credit availability for Main Street businesses.