Regulatory change has reshaped Europe’s corporate lending landscape since the global financial crisis, and its effects are proving structural rather than cyclical.
European banks, historically the primary lenders to mid-sized companies, have faced rising capital, liquidity and leverage requirements under successive regulatory regimes, most recently through Basel III. These rules increase the cost of holding risk-weighted assets (RWA) on balance sheets and reduce attractiveness of long-dated, illiquid loans to small and medium-sized enterprises.
Whereas the U.S. has delayed final implementation and may tone down aspects of Basel III later this year, Europe has moved ahead. Its centerpiece regulation for calculating RWA, Capital Requirements Regulation III (CCR III), became EU law last year, with the Basel “Endgame” rules due to be fully enacted by 2030. During that span, Europe’s top four banks are expected to see their minimum Tier 1 capital requirement increase to 11.0% – 16.5%[1] compared to 8.5% – 11.5% for their U.S. counterparts.[2]
The result is a long-term funding gap for mid-market companies and private equity sponsors that cannot be efficiently met by Europe’s syndicated loan or high yield bond markets, which are roughly 30% the size of those in the U.S..[3] Private credit funds offer certainty of execution, speed and tailored capital solutions which European banks are less able to provide. European private credit fundraising has consequently expanded nearly twice as fast as the U.S. over the past decade and surpassed one-third of global totals for the first time in 2025.[4]
That said, European private credit captured 24% of leveraged loan issuance in 2025, including bank underwritten syndicated loans, compared to 40% in the U.S., suggesting ample opportunity for private credit gains at banks’ expense.[5]
Business Cycle Resiliency
Beyond filling a supply gap, European private credit has demonstrated resilience across economic cycles, underpinned by more conservative deal structures and stronger lender protections than in public leveraged finance markets catering to much larger borrowers. In Europe’s mid-tier lending market, transactions are predominantly offered bilaterally or by small groups, allowing lenders to negotiate bespoke documentation with clearer remedies in downside scenarios. This contrasts the covenant-lite structures that dominate the broadly syndicated loan market, particularly in the U.S.
Maintenance covenants remain common in European deals below approximately EUR 75 million in EBITDA, providing lenders with earlier warning signs and greater scope for constructive intervention. Concurrently, European private credit transactions feature lower leverage and higher equity contributions from sponsors compared to the U.S., which helps absorb losses before senior lenders are impaired. Sector exposure also matters. Private credit portfolios are heavily weighted toward defensive industries such as insurance, software and healthcare, which have historically exhibited more resilience through downturns.
Over the last decade, European default rates were lower than in the U.S. two-thirds of the time, averaging 1.1% and 1.5%, respectively,[6] including through COVID-19 and the recent inflationary tightening cycle.
Relative Return Outlook
Europe continues to offer compelling return prospects for global investors, particularly on a risk-adjusted and diversified basis. Despite growing allocations, the European private credit market remains less crowded than the U.S., with fewer active lenders, greater jurisdictional complexity and limited alternative financing channels for borrowers. Moreover, Europe lacks Business Development Companies (BDCs), which comprise nearly half of U.S. direct lending assets under management.[7]
These factors support wider pricing, and European private credit has consistently offered a yield premium over comparable U.S. transactions,[8] persisting even as global absolute yields rise, reflecting structural rather than temporary imbalances between supply and demand.
For U.S. investors, this yield advantage is particularly attractive when combined with currency hedging, allowing exposure to higher European credit spreads while retaining the U.S. dollar base rate. For European investors, allocating domestically reduces reliance on dollar assets and provides insulation against U.S. dollar depreciation, while still accessing floating-rate instruments that offer protection in inflationary environments. More broadly, European private credit provides diversification benefits, with returns driven by credit selection and structuring over market sentiment.[9]
Regulatory-driven bank retrenchment, conservative market structures and attractive relative value explain why European private credit has moved from a niche allocation to a core component of institutional portfolios. The funding gap created by constrained banks is unlikely to close, lender protections remain robust and return premiums endure. For investors seeking resilient income, capital preservation and diversification, Europe is well positioned to remain at the forefront of global private credit growth.
Mark Jochims is Head of European Private Credit at Morgan Stanley Investment Management
[1] Source: Company reports. ABN AMRO, BNP Paribas, DNB Bank, HSBC.
[2] Source: Company reports. Bank of America, Citigroup, JPMorgan Chase, Wells Fargo.
[3] Source: PitchBook LCD.
[4] Source: PitchBook LCD.
[5] Source: PitchBook LCD.
[6] Source: PitchBook LCD.
[7] Source: LSEG | BDC Collateral.
[8] Source: KBRA DLD.
[9] Source: PitchBook LCD.
