What does a private credit lender pay for its own borrowing?
More than a comparable borrower does, and the gap widens when policy tightens. Federal Reserve staff examining supervisory loan data find that banks charged business development companies an additional interest-rate premium of about 0.9 percentage point during the tightening period, and that the premium reached roughly 1.1 percentage points over the cycle.
The comparison is the part that matters. This is not a business development company being charged more than a blue-chip corporate. It is a business development company being charged more than another borrower carrying the same internal credit rating at the same bank, with similar observable characteristics (Sharjil Haque and Jessie Jiaxu Wang, Federal Reserve Board, FEDS Notes, 7 August 2026).
It is also priced against better paper. The authors note that bank loans to these lenders are more likely to be first-lien senior secured, are more frequently collateralized, and carry lower loss-given-default estimates from the banks themselves. On the ordinary logic of credit pricing, that combination should earn a discount rather than a premium.
The study runs from the third quarter of 2012 to the fourth quarter of 2023, with the tightening window covering the first quarter of 2022 to the fourth quarter of 2023. FEDS Notes carry the standard caveat that they present the views of Board staff rather than the Board itself, and that limit applies to every figure quoted here.
How large is this part of a lender's balance sheet?
About 40 percent of it. Bank loans now make up roughly 40 percent of business development company debt on average, up from about 20 percent a decade earlier, and total bank commitments reported in the supervisory data exceeded 60 billion dollars by the end of the sample period.
The form the funding takes is as important as the amount. In dollar-weighted terms, nearly 90 percent of bank lending to these companies is credit lines rather than term loans. A credit line is a facility that can be drawn, repriced at renewal, and negotiated down in size, which makes it a very different liability from a fixed term borrowing.
So the leverage behind a large part of the private lending market is revolving, bank-supplied, and renegotiated on a schedule the borrower at the far end never sees. That is the structure worth holding in mind when a fund quotes a spread and a hold size with confidence.
None of this says the funding is fragile. It says the funding is a market with its own pricing, its own cycle and its own counterparties, and that the terms set in it precede the terms offered to operating companies rather than following them.
“Every lender in a process will tell you what it can hold and at what price. Very few volunteer what the money behind that answer costs them, or when the facility supplying it next comes up for renewal. Those two facts do more to predict a lender's behaviour in a difficult year than anything in the term sheet.”
Why can banks charge a premium on safer paper?
Because very few banks supply it. The three largest lenders account for 47.07 percent of utilized bank lending to business development companies, against 38.03 percent for lending to nonfinancial firms, and the concentration measure the authors use is 0.78 against 0.66 for the nonfinancial book.
The authors put the mechanism plainly enough. Bank funding to these lenders is concentrated and relationship-based, and the premium may partly reflect the banks' bargaining power in the upstream market for private credit funding. They also state directly that the premium is unlikely to reflect only compensation for credit risk.
That is a different explanation from the one the market usually reaches for. The common reading of a wider funding spread is that the lender got riskier. Here the paper is senior, secured and assessed at lower loss given default, and the price still went up, because the number of institutions willing to write the facility is small and the borrower has nowhere obvious to take the business.
The consequence for anyone further down the chain is correlation. If a handful of banks stand behind most of the market, then a change in appetite at any one of them is not an idiosyncratic event affecting one fund. It moves capacity across several lenders that an operating company might have believed were independent alternatives to each other.
| Share of utilized bank lending | To business development companies | To nonfinancial firms |
|---|---|---|
| Top 3 banks | 47.07% | 38.03% |
| Top 5 banks | 64.75% | 54.12% |
| Top 10 banks | 84.65% | 71.01% |
| Concentration measure (Gini) | 0.78 | 0.66 |
What happens to those lines when conditions tighten?
They get drawn, hard, at exactly the moment they are most expensive. Business development company credit-line utilization rose by 14.2 percentage points more than that of other borrowers during the tightening period, taking the total utilization gap between them and non-business-development-company borrowers to 18.6 percentage points.
Read that alongside the pricing finding and the sequence becomes uncomfortable. The premium widens, and the lenders paying it draw more rather than less. A revolving facility is the shock absorber in a levered lender's funding stack, and the evidence is that it absorbed a great deal in 2022 and 2023.
A line that is heavily drawn is a line with less room in it. That matters to a borrower for a reason that has nothing to do with the borrower's own credit: an add-on acquisition, a delayed draw, or an accordion two years into a hold all depend on the lender still having undrawn capacity behind them when the request arrives.
This is the same point covered on this site under a lender's capacity against its fund size, approached from the funding side rather than the fund side. The two constraints are separate and a lender can be tight against either one.
What should a borrower do with this?
Ask three questions that are answerable and rarely asked. Which banks provide this lender's facility, when does it next reprice or renew, and how much of it is currently drawn. A lender that will not answer any of the three has told you something by declining.
Then treat the answers as information about correlation rather than about that single lender. If two of the funds bidding on the same financing are levered by the same two banks, the diversification in the process is smaller than the number of term sheets suggests, and a change in one bank's appetite can move both quotes in the same direction in the same quarter.
Run a bank process in parallel where the business supports one. A bank lending from deposits and a fund lending from a repriced revolving facility are not in the same position when a year goes sideways, and the comparison between them is not only about the headline spread.
None of this is a reason to avoid private credit, and the research does not make that argument. It documents that the funding sitting behind a large part of the market is priced above what its own risk characteristics would suggest, supplied by a short list of institutions, and drawn hardest when it costs most. A borrower who knows that asks better questions in a process than one who does not.
As of August 2026
Sources: Sharjil Haque and Jessie Jiaxu Wang, "The Price of Bank Funding Behind Private Credit: Evidence from Business Development Companies", Federal Reserve Board, FEDS Notes, published 7 August 2026, read from federalreserve.gov, for the additional interest-rate premium of about 0.9 percentage point charged to business development companies during the tightening period and for the premium reaching roughly 1.1 percentage points over the cycle; for the comparison being against non-business-development-company borrowers with the same bank-assessed internal credit rating and similar observed characteristics; for bank loans to these companies being more likely first-lien senior secured, more frequently collateralized, and carrying lower bank-reported loss-given-default estimates; for the sample period running from the third quarter of 2012 to the fourth quarter of 2023 and the tightening window running from the first quarter of 2022 to the fourth quarter of 2023; for bank loans making up about 40 percent of business development company debt on average, up from about 20 percent a decade earlier; for total bank commitments to business development companies in the FR Y-14 data exceeding 60 billion dollars by the end of the sample; for nearly 90 percent of bank lending to these companies taking the form of credit lines in dollar-weighted terms; for business development company credit-line utilization rising 14.2 percentage points more than that of other borrowers during tightening and for the resulting total utilization gap of 18.6 percentage points; for the statement that bank funding to these companies is concentrated and relationship-based and that the premium may partly reflect banks' bargaining power in the upstream market for private credit funding; for the statement that the premium is unlikely to reflect only compensation for credit risk; and, at table 2, for every concentration figure quoted here, being top three banks at 47.07 percent of utilized lending to business development companies against 38.03 percent to nonfinancial firms, top five at 64.75 percent against 54.12 percent, top ten at 84.65 percent against 71.01 percent, and Gini coefficients of 0.78 against 0.66. FEDS Notes are articles in which Federal Reserve Board staff present their own analysis and views rather than those of the Board of Governors.