This paper examines how banks’ financing of nonbank lenders affects monetary policy transmission. Using supervisory bank loan-level data and deal-level private credit data, we document an intermediation chain: Banks lend to Business Development Companies (BDCs)—large private credit providers—which then lend to firms. As monetary tightening restricts bank lending, firms turn to BDCs for credit, prompting BDCs to borrow more from banks. This intermediation chain raises borrowing costs, as banks charge BDCs higher rates, which BDCs pass on to firms. Consistent with this pass-through, bank-reliant BDCs respond more strongly to monetary tightening, and BDC-dependent firms grow more but exhibit weaker interest coverage ratios. Overall, while bank lending to nonbanks mitigates credit contraction and supports investment during tightening, it amplifies monetary transmission by elevating borrowing costs and financial distress risk.

We study the role of bank liquidity regulation in the growth of private credit. Following the introduction of the liquidity coverage ratio (LCR), private credit increases significantly more in U.S. counties where banks subject to the LCR or where LCR-banks with a greater initial liquidity shortfall had a larger footprint. Our estimated effect of the LCR on private credit growth is comparable in economic magnitude to that of the capital shock from stress tests. The relationship between LCR footprint and private credit is stronger in industries that are more reliant on credit.

Payment-in-Kind (PIK) provisions allow borrowers to capitalize unpaid interest, offering flexibility but potentially enabling excessive forbearance. Testing predictions of a simple model with comprehensive Business Development Company (BDC) loan data, we show that PIK is primarily used for forbearance. PIK delays the recognition of early losses while predicting persistent deterioration later rather than recoveries. Adverse outcomes are driven by PIK exercised after (not at) origination. Consistently, lenders of PIK’ed loans extend their maturities rather than recapitalize the borrowers. Funding markets discipline excessive PIK-lending by BDCs: an increase in PIK-exposure reduces bank funding, and public equity investors discount PIK-exposure exercised post-origination.