A Closer Look at the Surge in Bank Lending to Nonbank Financial Institutions
Over the past year, the banking sector has witnessed a significant surge in lending to nondepository financial institutions (NDFIs) – outpacing all other forms of loans. This substantial growth, making up approximately 40% of all U.S. bank loan growth since the beginning of 2025, has triggered a series of concerns and speculation about the future of the sector in 2026.
Understanding the Risks and Impacts
Nonbank financial institutions, including private equity and private credit funds, mortgage originators, and insurance companies, have increasingly become primary recipients of bank loans. These NDFIs represent about 13% of total bank loans, a figure that is disproportionate to the 40% growth rate they accounted for in 2025, as per data from the Federal Reserve Board.
Julie Solar, group credit officer for North America Financial Institutions at Fitch Ratings, emphasized that while the risks associated with private credit are not systemic for the banking industry, the lack of transparency could potentially obscure the true state of the underlying borrowers’ performance. Consequently, smaller banks, due to their size and less diversified portfolios, may feel the heat more acutely than their larger counterparts.
Recent Credit Cracks and Bank Responses
The fall of 2025 saw a series of credit cracks in the sector as several nonbank borrowers declared bankruptcy. These incidents, including the fallout from Tricolor Holdings, First Brands Group, and two entities associated with real estate investment firm Cantor Group, led to higher chargeoffs or provisions for losses for more than half a dozen banks. This raised questions about the safety and resilience of the sector.
In response, banks claimed each incident was an isolated case, primarily due to fraud. However, Jamie Dimon, CEO of JPMorganChase, warned that these cases could be the tip of the iceberg. This sentiment caused jitters in the investor community, prompting banks to provide additional disclosures about their lending to nondepository financial institutions.
Despite these concerns, bank executives stressed the need to evaluate the quality, not just the size, of banks’ nonbank lending portfolios. They argued that not all NDFI lending carries the same level of risk. For instance, loans to Fortune 500 payment processors and insurance companies are quite different, from a credit perspective, than warehouse activity and loans to real estate-linked businesses.
Revised Disclosure Rules and Their Implications
Beginning 2025, banks were required to comply with new Federal Reserve protocols for filing call reports. The revised system expanded the definition of NDFI loans and introduced more stringent reporting standards. However, concerns have been raised about the new classification system. Analysts argue that the categorization is still too broad, leading to potential misunderstanding of banks’ operations.
The Role of Regulatory Shifts
The NDFI sector, which is currently valued at more than $2.5 trillion, has been growing steadily for nearly two decades. This growth is partly attributed to post-financial crisis regulations that constrained banks’ lending capabilities, leading to a shift towards nonbank financial institutions.
However, recent regulatory changes, including the rescission of the 2013 interagency guidance on leveraged lending, may change the dynamics of the banking industry. While some believe this will lead to a slowdown in nonbank lending growth, others foresee a broadening of banks’ risk appetite and increased competition in the sector.
The future of bank lending to nonbank financial institutions in 2026 remains uncertain. Whether it will continue to flourish or face a slowdown will be shaped by a combination of regulatory changes, economic landscape, and the banks’ risk management strategies.
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