Bankers Ride Deregulation as Private Credit’s Momentum Meets Market Realities

In the financial markets of 2025-2026, a notable shift is occurring in the competition between traditional banks and private credit firms. Once sidelined in segments such as middle-market lending, banks are now gaining renewed footing—helped in part by deregulation aimed at reducing capital constraints and compliance burdens. According to market analysts, regulatory easing, including adjustments to the Basel III Endgame capital requirements and revisions to older community reinvestment and lending rules, has enabled banks to streamline balance-sheet usage, reinvigorate loan origination, and better compete with private credit lenders.

This evolving landscape has not removed private credit from the equation, but it has opened the door for banks to reclaim market share they ceded during the post-2008 era. Private credit’s explosive growth, now widely cited as exceeding $3 trillion in assets under management, reflects pent-up demand for direct lending to businesses that traditional banks, with stricter risk and compliance profiles, once avoided.

Regulatory changes have given banks the flexibility to reenter areas like commercial and industrial lending and even form strategic alliances with private credit firms, allowing them to serve borrowers seeking tailored financing solutions while managing their own risk exposure.

Yet private credit’s rise is not without consequence. The sector’s increasing share of new commercial loans—capturing a significant portion of commercial real estate originations relative to banks—raises questions about long-term credit quality, transparency and systemic risk. In response, banks are exploring hybrid strategies and launching their own private credit funds or forming joint ventures that retain high-yield lending relationships while mitigating direct exposure on their balance sheets.

Private Equity’s Self-Sales, A Symptom of Exit Challenges

A separate but related phenomenon in private markets further illustrates the pressures on traditional capital flows. As conventional exit routes, such as initial public offerings and third-party sales, remain constrained, private equity firms are increasingly selling portfolio companies to themselves via continuation vehicles or continuation funds. This tactic has surged in 2025, with approximately 20 % of all private equity exits involving self-sales, an increase from around 12–13 % the previous year, highlighting how firms are navigating a lack of ready buyers while still returning some capital to investors.

Continuation vehicles allow a private equity sponsor to transfer ownership of a portfolio company from an older fund to a newer one managed by the same firm. The structure enables original limited partners to either cash out or roll their stakes into the new vehicle, while the sponsor retains control and intends to pursue longer-term value creation. While this strategy can alleviate pressure on firms grappling with illiquid holdings, it has ignited debate among investors and industry watchers.

Critics argue the practice can mask the true performance and valuation of assets. Continuation deals can create an appearance of liquidity and successful exit activity, even when external demand for the asset is weak, raising concerns that valuations may be artificially maintained or misaligned with broader market conditions. In extreme cases, investors have pursued litigation, claiming that assets are undervalued or that conflicts of interest undermine fairness.

Proponents contend that continuation vehicles offer a pragmatic solution to a prolonged dealmaking downturn, enabling firms to return some capital to existing investors while preserving the potential for future upside under better market conditions. As one market report noted, the rise in continuation usage reflects both a need to address liquidity gaps and a strategic choice by private equity firms to hold assets they believe still have long-term value.

Market Implications, A Tectonic Shift in Capital Formation

The convergence of deregulated banking activity and private equity self-sales reveals deeper structural trends in today’s financial ecosystem:

• Banks Are Becoming More Competitive: Deregulation is providing traditional banks with renewed capacity to lend and syndicate deals they previously ceded to private credit. This may lead to compressed pricing power for private credit funds and a rebalancing of capital sources in the middle market.
• Private Credit Remains Pervasive but Risk Is Growing: As private credit continues its rapid expansion, sometimes outpacing transparent regulatory oversight, traditional banks may benefit from a disciplined but opportunistic reentry into more sophisticated lending segments.
• Continuation Sales Raise Governance Questions: The prevalence of internal sales within private equity underscores the persistent lack of external exit pathways, and challenges both transparency and investor confidence in valuation practices.
• Capital Allocation Dynamics Are Changing: With longer hold periods and innovative structures like continuation funds, private equity’s traditional buy, build, sell model is transforming. This could affect future fundraising, distribution patterns, and institutional appetite for alternative assets.

In a market where capital is simultaneously abundant and constrained, the competitive interplay between deregulated banks and innovative private market structures is reshaping the landscape. As 2026 unfolds, the balance between regulatory flexibility, risk management and investor protection will be central to the evolution of credit markets and to the broader health of global finance.