The period 2007-2010 is marked by boom and bust in the stock market, greater capital market investment by banks, higher profits of the banking sector and fall in growth of credit to the private sector in Bangladesh. In this backdrop, using bank level data for the period 1990-2009, the study examines the impact of banks’ greater investment in capital market on the expansion of private sector credit. Descriptive statistics shows that medium sized banks have much higher investment in capital market than the small and large banks. The investment in capital market is also higher for the 2nd generation banks and banks with merchant banks and brokerage houses. Both OLS and fixed effect results provide strong indication that banks’ greater investment in the capital market crowded out private investment during 2000-2009. The results show that 1 per cent increase in banks’ capital market investment is associated with 0.006 per cent to 0.007 per cent decrease in banks’ credit to the private sector.  This crowding out effect is found to be more pronounced for the banks having merchant banks and brokerage wings.