The Private Credit Boom: Why Banks Are Losing Control of Lending
This analysis forms part of our coverage of the European banking sector and European Business News, and is updated alongside daily reporting in the European Business Magazine newsroom.
For decades, Europe’s credit system was dominated by banks. Corporate borrowers, from family-owned manufacturers in Germany to fast-growing software companies in France, relied almost entirely on their local lenders for loans. Today, that system is being quietly but fundamentally rewritten. Private credit — lending by investment funds rather than banks — has exploded, reshaping who controls capital, who bears risk and where profits are made.
What private credit actually is
Private credit refers to loans made directly by non-bank institutions such as asset managers, private equity firms and specialist debt funds. Instead of issuing bonds or borrowing from banks, companies raise money from these funds, often through bespoke, privately negotiated deals.
The appeal is simple. Borrowers get faster decisions, flexible terms and fewer regulatory hurdles. Investors, including pension funds and insurers, receive higher yields than they can get from government bonds or investment-grade debt. And fund managers earn lucrative fees for structuring and managing these loans.
Across Europe, private credit assets have more than tripled in the past decade, making it one of the fastest-growing corners of global finance.
Why banks are giving up control
The rise of private credit is not happening because banks suddenly stopped wanting to lend. It is happening because regulation has made it harder for them to do so.
Since the financial crisis, European banks have been forced to hold far more capital against risky loans. That has made traditional lending more expensive and less attractive. At the same time, higher interest rates have revived margins, but they have also increased the cost of holding long-term risk.
To cope, banks have increasingly adopted an “originate-and-distribute” model. They arrange loans for companies, but then sell much of the exposure to private credit funds. As detailed in our analysis of how banks fuel the private credit boom, this allows lenders to earn fees while shifting credit risk off their balance sheets.
The result is that banks still sit at the centre of deal-making, but no longer control the capital in the way they once did.
The role of markets and dealmaking
Private credit has surged partly because Europe’s capital markets have become more volatile. Bond markets can shut abruptly, and equity investors are often reluctant to fund leveraged companies. In that environment, private funds offering certainty of financing have become invaluable.
The revival of European markets and the rebound in global dealmaking have turbo-charged the trend. Private equity firms need large amounts of debt to finance acquisitions, and private credit has stepped in to fill the gap.
In effect, private funds have become the shock absorbers of Europe’s financial system, providing liquidity when public markets hesitate.
What this means for companies
For mid-sized European businesses, private credit has been a lifeline. Instead of negotiating with multiple banks, they can strike a single deal with one fund. That speeds up acquisitions, refinancings and expansion.
This is particularly important in sectors such as healthcare, software and industrial technology, where growth opportunities often arise quickly and unpredictably. Private lenders can move in weeks, while bank syndicates may take months.
The danger is that private loans often come with higher interest rates and tighter covenants. If economic conditions deteriorate, heavily leveraged companies could find themselves under intense pressure.
Why investors love private credit
For institutional investors, private credit has become a core asset class. With government bonds still offering modest real returns, pension funds and insurers are eager for income. Private loans, often floating-rate and secured against assets, offer yields of 7–10 per cent or more.
That has made private credit managers some of the biggest winners in European finance. Their shares now form an increasingly important part of European stocks, alongside banks, insurers and exchanges.
But private credit is not risk-free. Because loans are illiquid and rarely traded, losses can take time to emerge. A wave of corporate defaults could hit investors harder than expected.
The shadow-banking problem
Perhaps the biggest concern is that private credit is creating a parallel financial system that sits largely outside traditional oversight. While banks are subject to stress tests, capital rules and constant supervision, many private funds face far lighter regulation.
That worries central banks and regulators, who fear that risks are being pushed into a shadow-banking sector that could amplify any future downturn. If large funds are forced to sell assets or restrict lending, the impact on corporate financing could be severe.
At the same time, policymakers know that private credit is helping to keep Europe’s economy moving. Clamping down too hard could choke off investment just as the continent tries to re-industrialise and boost growth.
How this changes European banking
For banks, private credit represents both opportunity and threat. On the one hand, it provides a steady stream of fee income with relatively low capital usage. On the other, it erodes their long-term relationships with clients and shifts profits to asset managers.
Over time, this could turn banks into utilities that provide balance-sheet infrastructure while funds and fintechs control the customer interface. That would be a profound shift in Europe’s financial power structure.
What to watch next
Three trends will shape the next phase of the private credit boom.
First, defaults. Higher interest rates are squeezing borrowers, and a slowdown in growth could expose weaknesses in highly leveraged companies.
Second, regulation. European authorities are under pressure to bring private credit more firmly into the supervisory framework.
Third, competition. As more money pours into private credit, returns may fall, forcing funds to take greater risks to maintain yields.
The bottom line
Private credit has become one of the most powerful forces in European finance. It is providing capital, driving dealmaking and reshaping who controls the flow of money. But it is also creating new risks and shifting power away from the banking system that once dominated the continent’s economy.
For ongoing coverage of how this story is unfolding across markets, companies and policy, follow European Business News and the European Business Magazine newsroom.
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