Why Private Credit Grew—and Why Growth Is Not a Backstop

Private credit became a meaningful alternative to bank and syndicated lending for two related reasons: some firms needed a lender willing to handle harder-to-standardize loans, and investors became more willing and able to supply that credit. This chapter separates those demand and supply forces, then asks what funding costs contributed to the expansion. The distinction matters for the switching question because a large market can offer an alternative to some borrowers while remaining selective, leveraged and vulnerable to a change in its own capital base.

The evidence here is broader and older than the Federal Reserve’s recent US switching data. The BIS uses a cross-country panel covering 45 countries from 2010 through 2019 and a US demand-and-supply analysis running through the third quarter of 2024. Those studies explain mechanisms that help interpret PC capacity; they are not current estimates of how many US borrowers can switch in 2026.

A market can grow from two directions

The BIS describes private credit as non-bank lending from specialized investment vehicles to small and medium-sized nonfinancial firms. Its global loan-level data show outstanding private-credit loan volume rising from around $100 billion in 2010 to more than $1.2 trillion in the period studied. The United States accounts for more than 87% of the total in the later observations, while Europe excluding the United Kingdom accounts for roughly 6% and the United Kingdom for about 3% to 4%.

These figures establish the scale and geography of a long expansion, but they should not be combined mechanically with the Federal Reserve’s US market estimates. The sources use different definitions, dates and data constructions. The BIS describes the growth of private-credit loans in a global dataset; the Federal Reserve compares PC with LL and other debt for US private corporations. The useful common point is not one total. It is that PC has grown enough to matter as an alternative for some borrowers and as a funding channel that banks and investors must account for.

A market can grow because borrowers want more of it, because existing lenders cannot or will not meet demand, or because suppliers find it increasingly attractive to provide. The BIS tests four related conditions: lower policy rates, less efficient banking systems, more stringent bank regulation and higher leverage among nonfinancial corporations. In its 45-country panel, private-credit originations were higher when policy rates and the financial-institutions index were lower, and when bank regulatory stringency and corporate leverage were higher.

The magnitudes help distinguish the variables without turning them into a ranking of universal causes. A one-standard-deviation decrease in the policy rate—4.14% in the study’s sample—was associated with about 12% more private credit. A one-standard-deviation decrease in the financial-institutions index—0.17 points—was associated with about 33% more activity. One-standard-deviation increases in bank-regulation stringency and nonfinancial-corporation leverage were each associated with roughly 7% more activity. The financial-institutions index is a composite measure of depth, access and efficiency; a lower value means that local banks are less capable of meeting credit demand. The regulation measure is an index based on the World Bank’s survey, not a single rule.

The interpretation is economically plausible but not one-dimensional.