Fed Vice Chair Bowman warns of risks in $1.4T private credit market shift

Federal Reserve Vice Chair for Supervision Michelle Bowman has publicly warned that current capital regulations have inadvertently driven corporate lending away from regulated banks and into the $1.4 trillion private credit market. Speaking at the Hoover Institution's annual Monetary Policy Conference on 8 May 2025, she highlighted a shift where the bank share of corporate lending dropped from 48 per cent in 2015 to 29 per cent in 2025.

Bowman identified a perverse incentive within the Basel III framework, noting that banks often prefer lending to private credit funds rather than directly to creditworthy corporations due to regulatory treatment differences. To address this disparity, she proposed recalibrating Basel III risk weights to reduce the gap between bank loans to companies and bank loans to nonbank financial intermediaries. Under her suggested recalibrated framework, the risk weight on loans to investment-grade corporate borrowers would drop from 100 per cent to 65 per cent.

She emphasised that this change is not meant to push private credit out of the market, but rather to level the playing field. However, Bowman flagged the growing risks in the non-banking sector, including recent bankruptcies that imposed losses on banks and private credit lenders. Her comments come as the private credit market faces its most-watched and scrutinised stretch since the COVID-19 era.

Specific concerns were raised regarding exposure in the software sector, linked to artificial intelligence disruption. Blue Owl Technology Income Corp, which focuses on software and tech-related companies, reported 15.4 per cent redemptions in the fourth quarter of 2025, with a net outflow of $394 million. In the same period, North Haven Private Income Fund saw $123 million in outflows, compounding worries about stability in the sector.

Bowman called for enhanced regulatory reporting requirements for nonbank financial entities to better measure interconnection and concentration risks. She noted that 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 assessing these risks.

Her words come as the private credit market faces its most-watched and scrutinised stretch since the COVID-19 era. A worst-case private credit default forecast of 15 per cent has been predicted if AI-driven disruption hits corporate borrowers harder than expected, according to UBS Strategists in February. The next Federal Open Market Committee meeting is scheduled for June, and Kevin Warsh's confirmation as Fed Chair is set for 15 May 2026.