At first glance, this looks like a healthy banking system. But that placid picture masks a fast-growing vulnerability that could become the next major pressure point for banks and financial markets.
The fastest growing bank asset category is loans to non-depository financial institutions (NDFIs), a corner of the financial system that regulators have struggled to monitor and control, up 7% in Q4 vs Q3 and up 35% YOY to $1.4 trillion at year-end 2025. With growing signs of credit stress among nonbank companies, banks will eventually pull back from lending to NDFIs. The problem is timing. By the time banks tighten lending standards, many private companies dependent on this funding may already be heading toward collapse, and those failures will not stay confined to the shadow banking system. They will hit bank balance sheets directly.
U.S. corporate bankruptcies in 2025 surged to their highest level in 15 years, with over 700 companies filing for protection through November, marking a 14% increase over 2024. A large share of those failures involved private equity-backed firms.
Why is the rapid growth in bank lending to NDFIs a problem? We’re not talking here about mortgage companies with fully secured loans, but instead speculative credit and private equity schemes that are running out of cash.
The growth of private equity and credit is particularly problematic for banks. Many institutions are quietly masking early defaults through loan forbearance. When busted private equity firms cannot pay their debts, many seek to buy time by paying “in kind” with additional equity effectively issuing more of what the market already considers worthless.
But even more troubling than the high rate of growth in bank lending to NDFIs is the huge amount of undrawn loans available to these lightly capitalized companies involved in private equity and credit.
Banks currently have an estimated $2.8 trillion in unused loan commitments to NDFIs or exposure at default of 200% of current advances as defined by Basel III. A non-bank firm can draw on these contracted credit lines and immediately default, causing a massive loss to the bank lender. For every dollar of the $1.4 trillion in bank loans outstanding today to NDFIs, there are two dollars in undrawn loans or a total of $2.8 trillion, as shown in the chart below.
In practical terms:
Banks have $1.4 trillion in outstanding loans to NDFIs
They have another $2.8 trillion in undrawn commitments
That means for every dollar already lent, two more dollars are waiting to be drawn.
And a nonbank borrower can draw on those lines and default immediately, leaving banks with the loss.
Total potential exposure: roughly $4.2 trillion.
