Think of it like a water balloon. Squeeze one side and the other side will expand. This is essentially what Michelle Bowman, the Federal Reserve’s vice chair for oversight, told Hoover Institution attendees on May 8th. A decade of post-crisis banking regulations forced corporate lending out of regulated banks and into the hands of private credit funds and other non-bank lenders.
The numbers clearly tell the story. Banks accounted for 48% of the corporate lending market in 2015, but by 2025 that number has fallen to 29%. The differences did not evaporate. It has transitioned into an entity that operates with far less regulatory oversight.
Basel III squeeze
After the 2008 financial crisis, regulators around the world introduced Basel III, comprehensive capital and liquidity requirements aimed at making banks safer. Bowman’s argument is that Basel III capital requirements have significantly increased the cost of direct corporate lending for banks to maintain their balance sheets. Currently, for every dollar a bank lends to a company, the bank must set aside more capital as a buffer, hurting profitability.
Current rules actually give banks better capital treatment when lending to private credit funds than when lending directly to companies. When a bank makes a loan to a mid-sized manufacturer, it faces higher regulatory costs than when making a similar loan to a private fund and making a loan to that same manufacturer.
Why non-banks can win
When lending activity takes place within the banking system, the Fed and other institutions can monitor it, conduct stress tests, and intervene if things go in an unexpected direction. When it moves to a private fund, its visibility drops significantly. These nonbank lenders operate outside the regulatory framework and are not subject to the same capital requirements, stress tests, and disclosure standards as banks.
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 that were poorly supervised.
What Bowman wants to change
Bowman’s speech was more than just a diagnosis. The central proposal is to recalibrate Basel III capital requirements to better reflect the actual risks of different types of financing, rather than penalizing companies’ direct lending compared to indirect exposure through private financing.
In practice, this means adjusting the risk weights, or multipliers that determine how much capital a bank should hold for a particular asset. If a direct loan to a creditworthy company and a loan to a private fund that lends to the same company involve similar real-world risks, the treatment of capital should reflect that similarity.
Bowman made the remarks at a Hoover Institution conference focused on central bank independence. He said the lending transition is not a market failure but a regulatory design problem, and that the Fed has the tools and mandate to address it.
