In 15 years, bank lending to non banks has grown over 2,000%.
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The historic surge in bank lending to Non-Depository Financial Institutions (NDFIs) is one of the most underappreciated risks in the U.S. financial system. While recent scrutiny has centered on private credit, that focus is too narrow. Bank regulators and investors should be examining banks’ full web of exposure to NDFIs, including private equity firms. At the core of the problem is opacity: most NDFIs operate with limited transparency, leaving fundamental questions unanswered about how they conduct due diligence, assess borrower quality, and value underlying assets. There is little visibility into how these firms measure default risk or mark their portfolios. Because NDFIs typically do not take public deposits or premia, they fall outside the rigorous, risk-based supervisory frameworks applied to banks and insurers. Despite NDFIs increasing interconnectedness with asset management firms, banks, insurance companies, pension funds, retail wealth managers, and university endowments, no single regulator is empowered to conduct risk-based examinations of how, or if, NDFIs identify, measure, control and monitor their credit, liquidity, market, and operational risks.
Since 2010 when banks started being better regulated with rules from Dodd-Frank and Basel III, NDFIs have proliferated, They jumped into riskier transactions that in many cases banks jettisoned, since Basel rules required banks to allocate more capital to help them sustain unexpected losses. Yet, banks then proceeded to lend to every type of NDFI. Fifteen years later, lending to those firms has risen over 2,000%, a record high. Banks, not only lend to NDFIs, but they also often invest in them, source borrowers and clients for them, and are counterparties to them in transactions such as financial derivatives.
U.S. banks' lending to NDFIs is at record highs.
Data Source: FRED
As I have argued for years in Forbes, there is no such thing as risks being outside of the banking system. Bank lending to, investments in, and derivatives transactions with hedge funds, private credit, private equity, mortgage originators, and other NDFIs enable those institutions to be interconnected to a diversified wide range of corporations and other financial institutions. When corporates interconnected with NDFIs face challenges, it is not just the NDFI lenders or investors that suffer, the impact boomerangs immediately back to banks.
Bank of America and JPMorgan have the largest share of NDFI lending.
FDIC Data
Current investor nervousness about private credit is especially being driven by concerns about private credit firms’ exposure to software companies. About 20% of private credit loans are tied to software companies, and concerns abound over AI's impact on the business models of software firms, Recently this has led to valuation write-downs by alternative asset managers such as Blackrock and Apollo. While insurance companies have significantly more exposure to private credit than do banks, banks are interconnected to every sector of the economy.
Private Credit: Who Lends to Whom
Data from FDIC, The Guardian, Morgan Stanley, Perqin, Reuters & S&P Global
For all G-SIBs, their exposures grew in the range of 8-18% during the first quarter of 2026 in comparison to the same period in 2025. Goldman Sachs and Morgan Stanely have exposures to NDFIs that are over a third of their total assets. Their exposures to private equity and hedge funds are the largest exposures that they have to NDFIs, whereas their exposures as a percentage of assets to private credit are comparably significantly lower.
Bank loans to bank credit and other Non Depository Financial Institutions has grown significantly from 2025.
Data from bank financials.
Note: Total NDFI Exposure percentages include both funded loans (drawn capital) and unfunded commitments (legally binding credit lines). Annual growth rates are based on analyst estimates and reported FDIC and S&P Global quarterly data trends. Total Assets are rounded to the nearest billion dollars.
While globally systemically important banks have diversified banking activity portfolios, which can help them weather the storm, regional banks are not as diversified. For Customers Bank, EverBank, First Citizen, and Western Alliance, private credit exposures are over 10% of their total assets. This level is higher than for most G-SIBs.
NexBank and Western Alliance
A select group of specialized lenders has tied their survival to alternative investments and mortgage lending. In the landscape of non-bank lending, NexBank’s total exposure of 138.7% of total assets stands as a significant outlier. This figure represents the sum of funded loans (money already out the door) and unfunded commitments (legally binding promises to provide capital on demand). NexBank functions as a premier "warehouse lender," providing the short-term credit lines that non-bank mortgage originators use to fund home loans before they are sold to the secondary market. If the secondary mortgage market were to freeze, NexBank would be obligated legally to fund its outstanding commitments while possibly being unable to offload its existing loans. This potentially could outstrip its available liquidity in brief period.
Western Alliance is a primary infrastructure provider for NDFIs. Its almost 80%NDFI exposure, including a 30% concentration in Private Credit as a percentage of total assets —represents one of the most aggressive strategic pivots in the banking industry. Western Alliance has carved out a dominant niche in "Innovation Banking." Rather than lending directly to companies, it provides the "back-leverage" for private credit funds. This enables the bank to earn higher yields by lending to the lenders. However, if the private equity or credit markets face a significant liquidity crunch, Western Alliance’s clients would draw down their significant credit lines simultaneously. This would compel the bank to provide liquidity exactly when market conditions are most distressed.
Investors and bank regulators must keep their eyes on banks’ exposures to private credit and private equity. While the nation’s globally systemically important banks (G-SIBs) have the capital to absorb current market jitters, the critical concentration seen in regional lenders such as Western Alliance and NexBank represents a potential correlation trap. In a period of high interest rates and sector-specific distress, particularly in software and retail, these banks are no longer only lenders, they are key providers of liquidity at NDFIs.
Regulatory scrutiny under Basel III Endgame should intensify at banks. If it does, the banking industry will face a mandatory deleveraging phase that will likely define the next credit cycle. Risks that banks take matter because ordinary Americans’ deposits are at banks. Repeatedly, when banks get into trouble, taxpayers are forced to bail them out. And yet, when Americans suffer because of bank turmoil or crises, rarely are they offered a bailout.
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