Banks Are Back on the Middle Market Block Party

TLDR: I sat in on two debt-market panels in Dallas this month. The key insight I gained: Traditional banks are aggressively re-entering middle-market lending after years of ceding ground to private credit funds.

The middle market — businesses with roughly $10M–$1B in revenue — has two main places to borrow money:

For most of the last 15 years, banks turned down the middle-market volume and private credit came in to throw their own party. Post-2008 regulations made it more expensive for banks to hold these loans, so they backed off. Private credit funds filled the gap and grew from a niche product into a $1.3 trillion market on track to clear $2 trillion by 2027.

I had a front-row seat to the early innings of that shift as a PM at LendingClub, and later building Provide — both businesses that existed because banks had walked away or underinvested in segments they used to serve. The thesis underneath every non-bank lender of that era was the same: banks can’t effectively serve this customer segment, so we'll build the scaffolding to serve them better. For a long time, that thesis printed money.

What's new: that pendulum is swinging back. Here's what I saw across both panels and the data behind it.

The first panel — SFNet's "State of the Debt Markets" — had a debt finance executive who works on mid-sized buyouts. His quote of the night:

"The last six to nine months of deals we've done — it's yielded at a minimum five to ten term sheets, typically mostly on the commercial banking side. Even deals with significant customer concentration, we're still getting really good terms from commercial banks."

That last part is the tell. Two years ago, a deal with real customer concentration would've struggled to get a single bank to return the NDA. Now banks are competing for it.

The system-level data confirms it. Commercial bank business lending (the official term is "C&I" — commercial and industrial) jumped 12.7% quarter-over-quarter in Q1 2026, per Federal Reserve data. For comparison, all of 2025 saw 4.3% growth. 

Per-bank numbers tell the same story:

The Fed's quarterly survey of senior loan officers explains why. Among banks that eased their lending terms last quarter, every single one cited "more aggressive competition from other lenders" as a reason. They also pointed to a more favorable economic outlook — but the dominant story is competition: they're getting outbid and they want the deals back.

The second panel — TMA's private credit session — got specific on pricing. The consensus from people doing these deals: bank pricing is cheaper relative to private credit than it was 12 months ago, and the spread is still widening. An investment banker on the SFNet panel called what's happening to private credit pricing "gapping out" — but flagged that it's early innings: "We haven't seen it roll all the way through the system yet, but you're beginning to see the trickles."

How wide is the gap? About 200 basis points (2 percentage points) on comparable deals, according to senior loan bankers. On a $50M loan, that's roughly $1 million per year of interest expense difference. Real money.

And borrowers have started actually moving. PitchBook tracked $7.3 billion of loans in Q1 2025 refinancing out of private credit and into bank-led deals in a single quarter — the second-highest volume in at least four years. The borrowers who switched saved an average of 263 basis points (2.63 percentage points), with savings ranging from 200 to 375 bps. Recognizable companies are doing this: Avalara (the tax compliance software company), Kaseya, Finastra, ECI.

Why is private credit pricing staying high — and getting choosier? A few reasons:

Cautious means pricier and pickier.

Important caveat came from a private equity executive on the SFNet panel. The bank comeback isn't universal — it's segmented. In his words: "At the lower end — your $0–100M credits — commercial banks have been more active, more competitive than any point in the last few years. Anything north of that, we're almost always going to private credit. To club up a bank deal in the $100–500M range — that's really challenging."

(When banks finance a big loan, they typically can't hold all of it themselves — they have to break it up and sell pieces to other banks. That coordination (syndication) is slow, fragile, and gets harder as deals get bigger or messier. Private credit funds don't have this problem. They just write the whole check from a single pool of capital.)

But here's the nuance the TMA panel added: banks aren't simply losing the big deals — they're repositioning as the arranger. As one panelist put it, the largest banks increasingly make their money as the agent: they'll lead a billion-dollar syndicated deal where $300M of it now gets filled by private credit. JPMorgan's own $50 billion direct-lending push (February 2025) is the same move from the other direction — if you can't beat private credit through traditional syndication, partner with it, or become it.

The panelists made a quieter point worth pulling out: bank consolidation is making banks more competitive. The numbers tell that story sharply, and Texas is where it's happening fastest.

Texas led every state in bank M&A in 2025, with 21 announced deals. Dallas–Fort Worth and Austin keep pulling in corporate headquarters and growing faster than the national average, so out-of-state banks are paying premiums to get in. The big 2025/early-2026 deals:

For Huntington specifically: the Cadence and Veritex deals plant a large, well-capitalized lender in Dallas–Fort Worth and Houston with an explicit mandate to grow commercial lending in Texas.

When a regional bank doubles its size and tells investors it's going to grow earnings, somebody on that bank's commercial team has to write the loans. That's where the 5–10 competing term sheets come from.

This part wasn't in either panel, but it's the macro story underneath everything. On March 19, 2026, federal banking regulators released proposed rules that would lower how much capital banks have to hold against their loan books. In plain English: the cost of being a bank just went down, especially for smaller and mid-sized banks. Less capital tied up means more room to lend.

The reductions are modest in percentage terms but meaningful: roughly 2.4% lower for the largest banks, 3.0% for mid-sized, and 7.8% for the smallest. PwC's read: the package "improves the economics of traditional lending in ways that could pull some activity back toward banks."

Comments are due June 18, 2026. Even if the final rule lands softer than the proposal, the direction is set. Bank lending is getting easier and cheaper at the same moment private credit is getting harder and more expensive.

More options for borrowers

Most fintech lending products were built for a world where banks wouldn't fund the deal. Banks still aren't faster or more flexible — that hasn't changed. But they're cheaper, by about 200bps, and borrowers will wait a few extra weeks to save it. The value proposition "we fund what banks won't" no longer plays.

A supply wave is coming

There's roughly $510B of PE dry powder from 2020–2023 that has to deploy, and about 27% of sponsor holdings are now 7+ years old and overdue to exit. That's a backlog of deals that must happen, each one shopping debt into a market with 5–10 bidders. Banks will keep their top accounts on relationships. An obvious opening for software is facilitation of everything below that line, where pricing and matching are the bottleneck.

The easy read is "the pendulum is swinging back." I don't buy it. Pendulums return to where they started. This market isn't going back to banks — it's erasing the line between them.

Look at what's actually happening: JPMorgan running a $50B direct-lending book, banks leading billion-dollar deals and quietly filling a third of them with private credit. The fund and the bank now show up to the same deal, on similar terms, increasingly as partners. "Bank or private credit" is becoming a question of which pocket the money comes from, not what it costs or how it's built. The label is turning into noise.

Which is why I'd be careful crowning banks the winner. Not all of Dimon's cockroaches have crawled out yet. Banks are aggressive today because competition is fierce and the economy still looks fine — both cyclical, both reverse. Every time the market agrees on who won lending, it's usually standing at a top.

So if you're building, don't build for who's absent. The companies that lasted weren't betting banks would stay gone. They were the rails — indifferent to whose balance sheet funded the loan, and paid every time one did. That's the only side of this trade that survives the next swing.

Like what you’ve read? Consider subscribing, or reply to this message - we read everything!

Sources