A well-intentioned safeguard designed to prevent another 2008 financial crisis just got lifted. And this same safeguard accidentally created a $700 billion industry that operates beyond regulators’ reach. Has private credit’s meteoric rise met its maker?
Federal banking regulators have dismantled restrictions from 2013 that prevented banks from making high-risk corporate loans, reversing a policy that inadvertently created the massive private credit industry.
The FDIC and OCC eliminated the “leveraged lending guidance,” calling it excessively restrictive. The original rule had discouraged banks from issuing loans exceeding six times a company’s annual earnings; deals commonly used for private equity buyouts and funding unprofitable or pre-revenue tech startups. Banks faced regulatory penalties for crossing this threshold.
This regulatory vacuum, however, allowed unregulated private investment firms to dominate the space. From 2006 to 2024, capital for private-equity lending surged over 100-fold to roughly $700 billion. Firms like Apollo Global Management and Ares Management flourished, while traditional banks like JPMorgan Chase and Bank of America watched as business migrated elsewhere.
Regulators acknowledged their policy backfired on the banks, noting it pushed leveraged lending “outside of the regulatory perimeter.” Banks can now assess loan risk independently without fixed regulatory limits, though this will intensify competition with private lenders they’ve increasingly partnered with.
The move represents another victory for banks under the current administration, which has already weakened consumer protections, halted efforts to increase capital requirements, and encouraged more M&A activity.
The Federal Reserve hasn’t yet joined this rollback, though insiders expect it will follow. Some major banks have already begun issuing loans that would’ve violated the old standards, including JPMorgan’s financing for Sycamore Partners’ Walgreens deal.
Tim Long, the former chief national bank examiner of the OCC, questioned whether regulators are going too far. While acknowledging the logic of bringing risky lending back under regulatory oversight, he warned the underlying loans remain “toxic” and destined to eventually “melt down.”