Could Private Credit Be the Source of the Next Crisis?

*This article appears in the second quarter 2026 issue of Bank Director magazine. You can subscribe here.

When JPMorgan Chase & Co. CEO Jamie Dimon announced $170 million in charge-offs last October due to the bankruptcy of a borrower engaged in subprime auto lending, he hinted at more to come. “I probably shouldn’t say this, but when you see one cockroach, there are probably more,” he said.

Months later — as this story went to press — Dimon said some of the bank’s competitors were doing “dumb things” and compared the environment to the go-go-go years leading up to the 2007-09 financial crisis. “I don’t know how long it’s going to be great for everybody,” he said, adding that the next credit cycle could reveal who lent well and who didn’t.

Shortly before Dimon was fielding questions at his company’s investor day, Blue Owl Capital started to show signs of stress. On Feb. 18, the alternative asset manager that specializes in private credit sold $1.4 billion in assets across three funds to pay off investors and pay down debt, according to a press release. It wasn’t a fire sale — the assets were sold at par — but it did raise concerns around private credit, which has experienced explosive growth since 2010. As of March 12, Blue Owl shares were down 68% from their peak in January 2025, and the stock continued to decline after announcing the sale. Competitors such as Apollo Global Management, KKR & Co. and Blackstone also saw declines.

Could this be the canary in the coal mine for private credit? The passage of the Dodd-Frank Act in 2010 gave nonbank lending companies — sometimes called shadow banks — an edge, allowing them to take share in markets where banks dialed back lending. This includes leveraged loans, where business borrowers have high debt levels or low credit ratings, as well as mortgages, real estate and subprime loans. But this growth hasn’t happened entirely outside the traditional banking space. Instead, lending to nonbanks has contributed greatly to banks’ recent loan growth — and that’s raised eyebrows. While the Federal Deposit Insurance Corp. acknowledged that these loans tend to present a low credit risk to banks in its 2025 Risk Review, the agency also stated that losses could exceed past industry experience. “As more entrants into the private credit sector emerge,” the FDIC wrote, “increased competition could weaken underwriting and credit quality standards.” The credit decisions can be more difficult for banks to assess and monitor, and the sector’s dependence on less-stable funding sources could affect liquidity. Those cracks could split open in a downturn.

Mutual Benefits
As of the third quarter 2025, U.S. bank loans to nondepository financial institutions (NDFIs) stood at $1.3 trillion, according to the FDIC. The agency reported in January that bank loans to NDFIs grew 21% annually from 2010 through the third quarter of 2024, almost three times as high as multifamily loans, the next highest-growing loan segment, and far outpacing commercial & industrial and commercial real estate lending. The NDFI loans comprised 10% of total loans as of the third quarter 2025, up from less than 1% of loans 15 years ago.

That interconnected growth has raised alarms. “If you see a lot of capital pouring in or a lot of growth, you just have to look to a couple years down the line, and that’s where some of the problems will start,” says Christopher Wolfe, managing director and head of North America banks at Fitch Ratings. “Growth masks a lot of sins.”

Nonbank lenders need banks to grow, according to a June 2024 series of articles for the Federal Reserve Bank of New York. Among popular types of loans, banks provide funding and liquidity via senior loans to private credit companies, collateralized loans to real estate investment trusts (REITs), warehouse financing to mortgage companies, subscription finance loans to private equity firms and contingency funding in the form of credit lines that can be drawn down during stress. “In mortgage lending, private credit, the reliance on bank credit lines seems so crucial to their business models that they would not be able to conduct their activity without the support of banks,” says Nicola Cetorelli, one of the authors of the reports and head of financial intermediation at the New York Fed.

The relationships can be highly profitable, helping banks generate fee income while diversifying their portfolios with loans that carry a lower risk weighting. Put simply, the banking industry’s more stringent capital and liquidity rules make it difficult to directly lend to some borrowers, so they instead lend to nonbanks. For example, loans to private credit funds generated a 29% return on equity compared to 8% for commercial and industrial loans, according to the Federal Reserve Bank of Kansas City. And banks aren’t competing with private credit for the same customers, but rather “reaching a new set of higher-risk customers through indirect lending to private credit funds,” wrote Kansas City Fed Economist Jordan Pandolfo. Similarly in 2024, researchers from Harvard Business School and Purdue University found that bank loans to business development companies and similar nonbanks received more favorable capital treatment by regulators and were less costly to originate, underwrite and service.

No wonder so many large and regional banks are lending to the space. As of early February, NDFI loans represented around 10% of loans at $279 billion Huntington Bancshares, says Chief Financial Officer Zachary “Zach” Wasserman. “The concentrations in NDFI are in the lowest risk categories of almost any loans that we have,” he says, adding that they’re an attractive segment due to their high levels of growth, “terrific” returns and fee income opportunities. The NDFI loans at the Columbus, Ohio-based bank focus on three areas, he explains: fund finance, or capital call-line lending, which private equity firms use to manage cash needs; institutional REITs; and investment-grade insurance companies. Most of the loans are to institutional customers that are rated.

Credit Cracks
Private credit loans, generally made to middle market borrowers, are backed by investor capital instead of deposits. That funding structure is why they tend to be viewed as more stable: Investors can’t pull their funding the same way bank depositors can. Investors can request a regular redemption, usually on a monthly or quarterly basis, but it’s typically capped — generally no more than 5% of the fund’s assets. When markets are calm and investors feel confident, that’s generally not an issue. But stress or uncertainty can have investors looking for an exit, and that stress has arrived. Funds have experienced a recent uptick in withdrawals, with some reporting redemptions in excess of 5%. As of press time, Blue Owl had closed redemptions on one fund shortly before its asset sale, which will return 30% to investors, according to Bloomberg.

Crispin Love, a director in the equity research department at Piper Sandler & Co., expects to see some normalization in credit quality — but no widespread meltdown — for private credit and insured banks following years of low levels of defaults. “There could be one-off issues that come,” he says.

Huntington’s executives say the company has built a diversified portfolio with stringent concentration limits. “It requires a lot of discipline because a number of these areas can grow as fast as you would like for them to grow,” says Brant Standridge, the bank’s president of consumer and regional banking. Huntington manages the risks associated with its NDFI lending through experienced professionals and a consistent process, he explains. “Where I think any of these become challenges for banks is when they’re done in a very distributed way, and there’s not consistency across the organization,” he adds. “They’re not monitored the same across the organization; they may not be underwritten to the same consistent policy.”

Larger bank balance sheets such as Huntington’s tend to be more diversified, but smaller banks with higher concentrations of NDFI loans could be more exposed. A Fitch Ratings analysis of the most exposed institutions as a percentage of equity capital as of Sept. 30, 2025, included few banks above $50 billion in assets.

Along with higher concentrations, smaller banks could also lack insight into the health of the loan and the underwriting practices of its NDFI borrowers, says Amanda Hofstetter, principal within the banking and financial services practice at SolomonEdwardsGroup, a professional services firm. “They’re focused on the standard underwriting practices of the entity. They don’t look at the portfolio. They miss the liquidity mismatches,” she says. “It’s the traditional underwriting of the borrower, but that’s not who their borrower is.” She says more sophisticated risk assessment is needed. Boards should also see stress testing results and ensure appropriate controls are in place.

Jill Cetina, associate director of the commercial banking program at Texas A&M University, worries about banks’ ability to manage and monitor risk when there’s additional distance from the end borrower. “I’ve effectively outsourced, or I’m underwriting their underwriting,” she says. “That’s troubling, right?”

Oklahoma City-based Interbank, a subsidiary of Olney Bancshares of Texas with $5.5 billion in assets, isn’t participating in the sort of NDFI lending that’s gained scrutiny on Wall Street, says CEO C.K. Lee. As of mid-February, about $134 million of loans outstanding, roughly 3% of the loan book, involved NDFIs; an additional $51 million were unfunded commitments. The bank seeks nonbank lenders with industry expertise and skin in the game, like a real estate development firm with a lending arm that’s backed by a sizable balance sheet. The nonbank lender has the advantage of closing the deal a little faster than a bank might, but Lee says the borrowers are creditworthy, and the underwriting standards are equivalent to those of his bank. “… if anything comes up that could result in having to play a little jazz in the credit and work through it with the borrower, we have somebody that’s not just a hard money lender who’s going to be bringing out the stick and try to take the project back,” he says. “We actually have an operator who understands and can work with us or at least keep us adequately informed as they work through any issues that come up.”

It’s a “nice business” for Interbank, adds Lee. “This isn’t Wall Street private credit firms, but it is folks that are not banks who provide financing at the community level to build hotels, build industrial facilities, do one-to-four lot and land development loans — places where banks may stretch to get to attractive terms, but these areas can do them because of their familiarity. And then we take a piece of that.”

Hofstetter points out that “the NDFI term is not wildly understood.” Effective with call reports for Dec. 31, 2024, federal regulators required banks above $10 billion in assets to break out nonbank lending into five subcategories: mortgage credit intermediaries, business credit intermediaries, private equity funds, consumer credit intermediaries and other. The reclassification resulted in a roughly $333 billion shift in bank call reports from other loan categories to NDFI lending, according to the FDIC. As of the third quarter 2025, 25% of NDFI loans went to business credit intermediaries, including private credit funds, business development companies and collateralized debt obligations. An equal percentage were issued to mortgage credit intermediaries, such as mortgage warehouse facilities. Private equity funds comprised 24% of these loans.

While the disclosures have shone a brighter light on how banks are lending to NDFIs, critics argue that too much remains unknown about the industry’s exposure.

“It doesn’t tell you everything you need to know,” says Wolfe, including visibility into the underlying performance of the loans. NDFI lending is one of the top risks his team is tracking, he adds, along with consumer credit performance, digital assets, M&A and looser prudential standards. “Smaller banks need to have their radar up,” he says. “Don’t get lulled into thinking just because something has been a safe type of lending that it always will be.”

Too many banks remain “reactive,” adds Hofstetter, and don’t have the necessary data. “The analysis is lagging,” she says. “There isn’t the transparency that the market needs.” Boards should understand the NDFIs in their loan portfolio and the associated risks, including potential strains on liquidity. Central to NDFI lending are unfunded commitments — the portion of a credit line that could be potentially drawn down as needed. Fitch deemed larger banks’ liquidity profiles “solid” in the Dec. 15 note: “… cash and available-for-sale securities provided over 4.0x coverage, on average, of NDFI unfunded commitments, helping to mitigate concerns over nonbank borrowers drawing on lines under a dash-for-cash scenario.” For smaller banks with outsized growth and higher concentrations, coverage of unfunded commitments was lower, at 1.9x. “Credit losses may rise during an economic downturn while liquidity could be pressured,” wrote Fitch.

As a normal course of business, an NDFI will draw down on a credit line in a consistent way, says Cetorelli. But in a downturn, those demands could escalate. Affected institutions should understand how any sort of macro financial shock or change in the economy could affect NDFIs and by extension, the bank.

‘Goat Poo’
So far, the growing interdependence between banks and nonbanks has been a net positive for both sectors. But the New York Fed academics wrote in 2024 that this relationship could pose a systemic risk in times of economic stress — such as the global financial crisis — as those interdependencies “turn into vectors of shock transmission and amplification, forcing authorities to intervene and to do so en masse.” And since NDFIs are subject to less regulation and monitoring, they may have incentives to originate even more risk than banks, which in turn could amplify systemic risks.

Banks tend to assume as first-lien holders, they’ll be made whole after the loans start to sour. But “everybody runs for the exit at the same time,” says Bill Herrell, executive vice president and managing director who leads advisory services at Bank Director. “I’ve seen this story before. I’m trying not to be Chicken Little on this, but when this unwinds, it’s going to unwind overnight if it does.”

Many banks aren’t making loans to NDFIs, but they hold similar assets. If a lender becomes distressed and is forced to sell its assets, that could also mean the value of similar assets would decline.

Herrell looks back to his time as an investment banker in Atlanta during the 2007-08 financial crisis. Community banks had made a lot of construction development loans to creditworthy developers during the mortgage boom. But home sales slowed and mortgages dried up, and developers couldn’t sell those houses, at least not as quickly as they once did. The value of the lots dropped, reducing the collateral on those loans. Fast forward to today, and an NDFI could have a loan on an office building for $10 million that it would need to exit. Banks tend to consider the relationship, but the NDFI may care less about working out a loan. “So, they fire sale the office building for $6 million,” says Herrell. “What about the bank that has the loan on the building next door, that now has their collateral impaired by 40%?”

Eugene Ludwig, a former comptroller of the currency and CEO of the consulting firm Ludwig Advisors, similarly recalls the tri-party repo market in 2007, when it was used by broker-dealers to finance securities inventories and experienced stress after the collapse of Bear, Stearns & Co. and Lehman Bros. “Sometimes, the collateral was what the regulators expected it to be, which was Treasuries or the equivalent. Sometimes, the collateral quality slipped,” Ludwig says. “One nonbank player described the collateral that it was pledging as ‘goat poo.’”

More boards should consider the tail risks — unlikely but extreme scenarios — that could affect their bank by monitoring the marketplace as well as the bank’s own customers, says Ludwig. “What’s less likely to happen is typically the more dangerous,” he says. “When the tails, as they say, begin to fatten, there is a period of time in which you can take action and cut off the losses. But if you’re not on your toes and constantly monitoring and constantly doing scenario analysis and you miss it, that’s when you blow up.”

Disruption tied to artificial intelligence could throw a wrench in private credit, which has lent heavily to the software sector, analysts warned recently. Matthew Mish, head of credit strategy at UBS, has predicted from $75 billion to $120 billion in defaults in private credit and leveraged loans by the end of 2026, especially as software and data services firms financed by private equity take a hit, CNBC reported in February.

On the other hand, the regulatory environment could soon offer opportunities for banks to take share back from nonbank lenders. In December 2025, the FDIC and Office of the Comptroller of the Currency rescinded leveraged lending guidance from 2013 that had pushed that type of lending outside the regulated banking system; eight general principles regarding risk management replaced the guidance. “The recission of the leveraged lending guidance and the implementation of these principles appear to be a big step in permitting banks to implement appropriate underwriting and oversight over this type of portfolio,” wrote attorneys at Mayer Brown. “Such an approach may well allow banks to better compete with nonbank lenders in the leveraged loan market.”

In February, Fed Vice Chair for Supervision Michelle Bowman commented on the migration of mortgage lending from banks to nonbanks. Banks originated 60% of mortgages in 2008; that dropped to 35% as of 2023. Mortgage servicing had dropped even more dramatically, from 95% to 45%. She said two regulatory proposals would soon “increase bank incentives to engage in mortgage origination and servicing” through adjustments to regulatory capital requirements. As of press time, those proposals had not published.

The interconnection of banks and NDFIs will likely remain. “That’s natural. You have a huge financial system. The banks still play a very major role in that,” says Ludwig. But with so much activity occurring outside the banking system, it’s difficult for regulators to appreciate how interconnected the financial system truly is. The situation was similar in 2007, when much of the subprime mortgage activity was happening outside the banking sector, he says. “That isn’t to say that all nonbank lenders or all nonbank activities, they’re all bad,” he adds. “But when you have an unregulated market like this, you’re going to have some people with much less rigorous standards that are much less safe and that are pushing the envelope.”