Does Private Credit Hurt Bank Stocks?

Cross post from The Institutional Risk Analyst

January 15, 2026 | Looking at bank earnings so far this week, the big area of interest is the continued growth in loans to nonbank financial institutions (NBFIs) and private equity fund sponsors. Such is the investor concern about bank lending to NBFIs that JPMorgan (JPM) included a whole page in its investor presentation breaking out nonbank exposures.

Are concerns about the credit quality of NBFIs starting to weigh negatively upon bank stocks?  We think the answer is yes, especially after a 2025 of supranormal returns in bank stocks. Below is the now famous chart showing the total loans to NBFIs by US banks. Whenever you see an asset class that is more than 5% of total assets with double digit growth rates, it's usually bad. But what most investors don't appreciate is that the rising level of delinquency in private equity and credit is actually driving growth in bank lending for this $1.2 trillion loan category.

JPM’s exposure to NBFIs is growing rapidly, as shown in the chart below. The reported net-charge off (NCO) rate is still very low, but given some of the outrageous practices in the private sector used to conceal events of default, we wonder about the quality of this disclosure. As we’ve noted in past  comments in The Institutional Risk Analyst, there are a growing number of NBFIs that are hiding defaults under various canards.  And as discussed below, the banks rarely ask any questions.

Another major NBFI lender, Wells Fargo (WFC), this week saw its stock slide the most in six months after missing revenue estimates. But are managers really worried above WFC revenue given the banks impressive asset growth? Nope. Wells Fargo's lending to NBFIs is up 30% YOY or 10x the rate of increase in the rest of its loan portfolio. Does this suggest anything?

WFC's loans to NBFIs totaled $208 billion in Q4 with another $120 billion in unused commitments ready to go. Nonaccrual loans at WFC to NBFIs have increased ten-fold since last year.  While discussing the strong long growth at WFC, CEO Charlie Scharf described the fastest growing parts of the bank’s portfolio:

“The biggest piece of this category, as well as the driver of most of the growth, is from our fund finance group, which is largely subscription or capital call facilities for alternative asset managers, targeting larger funds with strong investment track records, where we have long-standing strategic relationships and that are generally backed by a diversified pool of limited partner commitments to the fund. Within commercial finance, the biggest piece is our corporate debt finance business, which is secured lending to asset managers and private equity funds that is typically backed by middle market and broadly syndicated loans. We underwrite, approve, and monitor the performance of each underlying loan.”

Do WFC or JPM re-underwrite and monitor each private loan that serves as collateral on the bank’s loans, much less the private companies in a PE firm’s portfolio? Nope. They depend upon the conflicted representations of the PE manager who earn big fees for continuing the pretense. This is why public markets are superior to private schemes, this regardless of the arguments made by officials of large private credit sponsors.

Since there is no visible public market for private equity and credit exposures, the lender banks must accept the static, unaudited valuations of the PE manager. Even if a lender haircuts a PE portfolio company 50%, he may still be underwater on the loans. Could the festering losses concealed inside the commercial loan portfolios of the largest banks be pushing down bank equity valuations?

While there is no visibility into private equity and credit funds, publicly traded business-development corps (BDCs) provide a window into this world that is subject to GAAP. The canaries in the proverbial coal mine are the BDCs, which have been suffering from falling equity valuations for months. The VanEck BDC ETF is shown below. BIZD holds approximately 35 stocks, providing exposure to BDCs that invest in private companies, with holdings rebalanced quarterly

“In Q4, non-traded BDCs with NAVs over $1B saw redemptions jump ~200% QoQ, rising from $981M to $2.9B+, according to Robert A. Stanger & Co. Ares Strategic Income Fund exceeded the standard 5% quarterly tender cap to meet investor demand,” notes Leyla Kunimoto in a LinkedIn post. She notes that despite the rise in redemptions from credit funds, fundraising remains strong: “BDCs are still on track to raise over $60 billion in 2025, according to Stanger.”

Will Poop Kill Private Equity?

One of the pernicious aspects of private equity and credit is that the portfolio companies inside PE funds generally do not follow GAAP. As a result, when a private equity portfolio company starts to use payment-in-kind (PIK) instead of paying banks and debt investors in cash, the value of the portfolio company may accrete higher. We suspect that one reason for the low stated default rates on bank loans to NBFIs, and also the high growth rates in bank loans outstanding, is that widespread forbearance is being tolerated by managers, investors and lenders. 

“Private Credit loan borrowers within these BDCs now often elect Payment In Kind (PIK), to suspend promised interest and principal amortization cashflows, without triggering contractual default, and thereby accrete new Principal Onto Original Principal ("POOP"),” notes our pal Nom de Plumber. Many PE funds actually treat PIK as an increase in equity value, he confides, and then borrow cash from a bank based upon these fictitious valuations to pay private equity investors.

"The BDCs will report that non-cash interest income, and must pay most to shareholders as dividends," NDP continues. "But with what cash?? If the BDC fails to make the minimum required payment to investors,” NDP asks, “they might lose IRS treatment as pass-through vehicles, and thereby begin to pay corporate income taxes, also. But with what cash??”

Several observers note that some BDCs currently may lack the cash to meet ANY redemption requests, thus public shareholders in the institutional community are voting with their feet. Yet the flow of new cash into private equity and credit funds suggests that the sponsors may manage the outflow of cash from older investors with new cash from greater fools. And we strongly suspect that some of the larger banks are advancing cash on moribund portfolio companies to delay events of default.

The Systemic Risk of NBFIs

The risk to banks posed by lending to NBFI’s is not a matter of conjecture. In a report issued this month by the Federal Reserve Bank of New York (“Transformed Intermediation: Credit Risk to NBFIs, Liquidity Risk to Banks”), the authors note that the rise of nonbank financial companies and funds has increased the exposure to banks. Since the banks use depositor funds to lend to NBFIs, the systemic risk is actually increased overall. 

For example, it is not the case that NBFI’s compete with banks in parallel using non-deposit funding such as term debt, but instead transform the deposits of large banks into risky nonbank assets. The authors (Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman) write:

“[T]he rapid asset growth of nonbank financial intermediaries (NBFIs) relative to banks is the outcome of transformations of risks between banks and NBFIs that increase the interconnectedness of the two sectors. These transformations are consistent with avoiding tighter, post-GFC bank regulation while harnessing the funding and liquidity advantages of bank deposit franchises and access to safety nets.” 

The authors explicitly reject the view of NBFIs operating in parallel with banks and thereby reduce risks to the banking system, and instead describe a world where NBFIs complement banks and increase systemic risk: 

“NBFI and bank businesses and risks transform, in a complementary manner, to avoid the consequences of stricter bank regulation while utilizing the funding and liquidity advantages of the banking system. The implication of our transformation view is that NBFI and bank businesses and risks become increasingly intertwined, but in a very particular way: banks make senior loans to NBFIs; NBFIs take on junior credit exposures to nonbank borrowers; and banks provide NBFIs with credit lines.” 

The FRBNY paper paints a grim picture of risk in the financial system today, whereby NBFIs have defeated regulatory limits and imported increased credit risk into the regulated financial institutions. The paper recalls that in the 1990s, when banks were perceived to be declining, off-balance sheet finance in fact increased the leverage in the system. In the 2000s, several researchers noted that “banks were not circumvented by the growth of securitization, but rather enabled securitization through liquidity and credit guarantees.” The song remains the same.

The FRBNY paper provides a sobering assessment of the possible consequences of NBFIs increasing risk to regulated banks.  If our surmise about the degree of forbearance in the US financial system is even remotely correct, then the weakness of US bank stocks may be caused by the same flight to safety that has caused BDC stocks to underperform over the past year.  They write:

“With respect to systemic risk, the liability-dependence of NBFIs on banks directly implies that losses at NBFIs can directly result in losses at banks. Indirectly, these dependencies imply that fire-sale liquidations by banks of assets of NBFIs can transmit shocks to other banks. Furthermore, more subtly, Cetorelli, Landoni, and Lu (2023) show theoretically and empirically that forced liquidations of any asset in some group of portfolios can result in fire sales of other assets in those portfolios. This would imply that shocks to NBFIs can impact banks even without exposure to that particular set of NBFIs.”

Full post: https://www.theinstitutionalriskanalyst.com/post/theira798