Think of it like a water balloon. Squeeze one side, the other side bulges. That, in essence, is what Federal Reserve Vice Chair for Supervision Michelle Bowman told attendees at the Hoover Institution on May 8: a decade of post-crisis banking rules has squeezed corporate lending out of regulated banks and into the hands of private credit funds and other nonbank lenders.
The numbers tell the story cleanly. Banks held 48% of the corporate lending market in 2015. By 2025, that figure had fallen to 29%. The difference didn’t evaporate. It migrated to entities that operate with far less regulatory oversight.
The Basel III squeeze
After the 2008 financial crisis, regulators around the world implemented Basel III, a sweeping set of capital and liquidity requirements designed to make banks safer. Bowman’s argument is that Basel III’s capital requirements made direct corporate loans significantly more expensive for banks to hold on their balance sheets. Every dollar a bank lends to a company now requires the bank to set aside more capital as a buffer, which eats into profitability.
Current rules actually give banks better capital treatment when they lend to private credit funds than when they lend directly to corporations. A bank faces a steeper regulatory cost for making a loan to a mid-sized manufacturer than for making an equivalent loan to a private fund that will then turn around and lend to that same manufacturer.
Why nonbanks are winning
When lending activity sits inside the banking system, the Fed and other agencies can monitor it, stress-test it, and intervene if things go sideways. When it moves to private funds, the visibility drops significantly. These nonbank lenders operate outside the regulatory perimeter and don’t face the same capital requirements, the same stress testing, or the same disclosure standards that banks do.
Bowman framed this as an unintended consequence of well-intentioned reform. The rules were designed to make the banking system safer, but they inadvertently pushed risk-taking into parts of the financial system with less oversight.
What Bowman wants to change
Bowman’s speech wasn’t just a diagnosis. The core proposal is to recalibrate Basel III capital requirements so that they better reflect the actual risk of different types of loans, rather than penalizing direct corporate lending relative to indirect exposure through private funds.
In practical terms, this would mean adjusting risk weights, the multipliers that determine how much capital a bank needs to hold against a given asset. If a direct loan to a creditworthy corporation and a loan to a private fund that lends to that same corporation carry similar real-world risk, the capital treatment should reflect that similarity.
Bowman delivered these remarks at a Hoover Institution conference focused on central bank independence. She positioned the lending migration not as a market failure but as a regulatory design problem, one that the Fed has the tools and the mandate to address.