Rebalancing the Regulatory Perimeter: How U.S. Banks Can Compete with Private Credit

Since the Global Financial Crisis, U.S. bank regulation has focused on one clear goal: strengthen the resilience of the banking system. Capital, liquidity, and supervisory standards were tightened, reducing systemic vulnerability. 

Over time, however, lending activity has increasingly migrated from regulated banks to nonbank financial institutions (NBFIs) including private credit platforms and nonbank mortgage lenders, often operating without comparable safeguards. 

The policy debate is shifting. The question is no longer “safety versus growth,” but how to preserve safety while keeping core lending inside the banking system. 

Recent signals from the Federal Reserve System, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation reflect a new approach: competitive enablement through risk-aligned calibration. Regulators are adjusting mispriced rules, clarifying supervisory expectations, enabling innovation, and tightening oversight where banks interface with nonbank lenders. 

Regulators are increasingly explicit about the migration of credit activity outside banks.  

One of the clearest examples is the U.S. mortgage market. Over the past fifteen years, mortgage origination and servicing have shifted substantially toward nonbank lenders. 

Banks originated approximately 60 percent of U.S. mortgages in 2008, but only around 35 percent in 2023. The shift in servicing is equally striking: banks held servicing rights on roughly 95 percent of mortgage balances in 2008, compared with about 45 percent in 2023. 

Beyond the numbers, regulatory framing itself has evolved. Policymakers now acknowledge that prudential regulations may have contributed to this structural shift. Some capital requirements may have become over-calibrated relative to the underlying risks, making certain activities economically unattractive for banks. 

This issue extends beyond housing finance. Nonbank financial institutions have steadily increased their share of corporate lending, leveraged finance, and specialty credit markets. While this competition can enhance credit availability, it also raises questions about where leverage, liquidity mismatch, and operational fragility accumulate in the financial system. 

Mortgage regulation is emerging as the clearest example of regulators’ evolving approach. 

Several policy adjustments under consideration are intended to encourage banks to re-engage in mortgage origination and servicing without compromising prudential safeguards. 

One focal point is the capital treatment of mortgage servicing rights (MSRs). Research and industry feedback suggest that changes introduced in 2013 significantly increased the capital burden associated with MSRs. Regulators are now considering removing the requirement to deduct mortgage servicing assets from regulatory capital while maintaining a high-risk weight and potentially revisiting the appropriate calibration of that risk weight. 

Another issue is the lack of risk sensitivity in mortgage capital rules. Current requirements often apply a uniform risk weight regardless of loan-to-value ratio (LTV), even though default probability and loss severity vary significantly with borrower leverage. 

Introducing LTV-sensitive risk weights could better align capital requirements with actual credit risk. Importantly, this would also increase the attractiveness of on-balance-sheet mortgage lending for banks, potentially reversing some of the migration toward nonbank lenders. 

Mortgage reform therefore provides a broader policy template: when regulators believe capital requirements are misaligned with underlying risk, recalibration may help keep economically essential lending within the regulated banking perimeter.

Regulators are also reassessing how large-bank capital frameworks affect the banking system’s ability to support lending and market liquidity. 

The Federal Reserve has framed this effort as modernization of the four pillars of large-bank capital regulation: 

• stress testing
• the supplementary leverage ratio (SLR)
• the Basel III capital framework
• the global systemically important bank (G-SIB) surcharge 

Several proposed changes aim to increase transparency and predictability in stress testing. By providing greater insight into supervisory models and scenarios, regulators seek to reduce volatility in capital requirements and allow banks to plan capital usage more effectively. 

Another focus is the supplementary leverage ratio. When the SLR becomes the binding constraint, it treats low-risk assets such as U.S. Treasuries the same as riskier exposures. This can discourage balance-sheet intermediation and reduce banks’ willingness to hold safe assets or support market liquidity. 

Ensuring that the leverage ratio functions as a true backstop rather than the primary constraint could help restore balance sheet capacity across several markets. 

More broadly, completing the implementation of Basel III is expected to provide clarity and reduce regulatory uncertainty, an important factor for banks competing with more flexible nonbank lenders.

Regulatory posture is not defined solely by written rules. Supervisory practices also influence how banks assess the feasibility of certain activities. 

Recent signals from regulators suggest an effort to ensure supervision focuses on material financial risks rather than administrative or procedural deficiencies. Supervisory frameworks are increasingly emphasizing risk-based oversight tailored to each institution’s size, complexity, and risk profile. 

At the same time, regulators are acknowledging that banks must be able to innovate to compete with fintech firms and nonbank lenders. 

This includes enabling responsible experimentation in digital payments, lending technologies, and emerging financial infrastructure, while maintaining appropriate safeguards for financial stability. 

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation have reinforced the same strategic direction through two complementary approaches. 

First, when supervisory guidance appears to function as a binding rule and inadvertently pushes activity outside the banking sector, regulators may reconsider its role. A notable example is the rescission of leveraged lending guidance and related FAQs that had constrained banks’ participation in that market. 

Second, regulators are increasingly focused on the interfaces between banks and nonbank lenders. Even when lending activity occurs outside the banking system, banks frequently provide funding, credit facilities, custody services, or operational infrastructure to nonbank platforms. 

These connections create transmission channels through which risks from highly leveraged or opaque nonbank entities can affect insured banks and the broader financial system. 

The evolving regulatory strategy does not represent an attempt to suppress private credit or nonbank finance. Instead, it reflects an effort to ensure that core financial intermediation remains viable within the regulated banking system. 

Three themes are likely to define the next phase of competition between banks and nonbank lenders: 

1. Recalibrated economics 
Adjustments to capital and supervisory frameworks may improve the economics of several lending activities within banks. 

2. Predictable regulatory operating environments 
Greater transparency in stress testing and capital rules could allow banks to commit to lending relationships more confidently through economic cycles. 

3. Stronger risk management at bank–nonbank interfaces 
As partnerships between banks and private credit platforms expand, regulators will expect robust governance, transparency, and counterparty risk management. 

Ultimately, the institutions best positioned to succeed will treat regulatory recalibration not simply as relief, but as an opportunity to re-evaluate product economics, strengthen data capabilities, and redesign risk management across the increasingly complex boundary between banks and nonbank financial institutions.