Controversies about banks' exposure to non-bank financial institutions (NBFIs) and private credit have been a hotly debated topic in the last few weeks and we think it will remain an important topic of discussion among banks, regulators and investors in 2026 . There are increasing concerns that both industry participants and policymakers share. The controversies surrounding recent defaults (Tricolor, First Brands) are raising questions about: private credit transparency, data availability, the quality of underwriting, loan security, off-balance sheet vehicles, secured lending, industry concentration, etc. There are also concerns about the reliability of the default rate calculations presented in the public domain and what they capture. Regulatory changes and the constant moving of the regulatory goalposts are expected to drive more business out of the banks into the private credit space , ie, growing balance sheets of NBFIs, direct lending (DL) and asset-based finance (ABF).
One of the main issues is that there is not much historical data in the public domain, operational benchmarks for managers are lacking, and past deal performance cannot be readily investigated and compared (due to private nature of transactions). So far, the performance in various avenues of private credit has been excellent and default trends in private credit portfolios do not appear worrying , although concerns have been expressed about the lack of stress and performance record tested under stressed conditions in recent years (a decade or so). It will take a credit cycle (at least) before more is known about the differences in lender behavior (NBFIs vs. banks) distressed entities.
In this note we look at the NBFIs/Private Credit/SRT controversy from six different angles , where we can refer to recent developments or statements. Given the fact that consensus is indicating a future mild deterioration in private credit, but with no real clarity regarding what we understand by 'mild' and the implications for the banking system due to the significant interconnection, we are certain that we will revisit the subject matter of this note a number of times next year as developments unfold and more information comes to light.
NBFIs and their link to the financial sector in Europe
The weight of NBFIs across Europe has risen markedly over the last 25 years, with their share of total credit rising from about 12% to 30% and their aggregate assets now outpacing those of banks. This shift has increased the entanglement of banks and non-banks through lending, funding, securities holdings and risk-transfer deals, such as SRTs.
Because a large slice of banks' funding from NBFIs takes the form of uninsured deposits concentrated in a handful of systemic firms, its sensitivity to confidence and market conditions can be acute. On the asset side, the largest banks also hold significant claims on NBFIs, so shocks have a natural two-way channel they can be felt in.
When liquidity mismatches and leverage at non-banks force asset sales, common exposures can turn price moves into cascades that wash back across balance sheets. Derivative positions add a margin-call mechanism that accelerates deleveraging when volatility rises. Greater hedge-fund trading in sovereign bonds can amplify these dynamics, with stress transmitted through repo markets even where direct bilateral exposures look small. For these reasons, the ECB has concluded that the system has not become safer and called for a macroprudential framework for NBFIs that accounts explicitly for the ties between banks and non-banks .
The BoE's stance on private credit
In the UK, the BoE's Governor Bailey casts private credit as a pre-crisis cocktail of opacity, layered leverage and eased underwriting that warrants close scrutiny . In his recent testimony before the House of Lords, Mr. Bailey cited the failures of First Brands and Tricolor as potential canaries rather than idiosyncrasies. I have paired that warning with plans for a system-wide exploratory scenario bringing banks, insurers, pensions and private-credit firms onto a single risk map.
According to the BoE governor, the core problem is visibility : unlike banks, private-credit funds disclose very little, obscuring where risks lie and how they are connected to the core system. Even when fund-level leverage looks modest, portfolio-company debt, subscription and NAV lines, warehouses and private securitisations stack hidden leverage underneath. Liquidity promises in “semi-liquid” vehicles can clash with illiquid assets if redemptions rise, turning taps into drains. In this setting, forced sales can transmit stress quickly through shared holdings, funding lines and derivatives. Mr. Bailey's focus is therefore less on the absolute size of private credit and more on the pathways by which it could boomerang into the functioning if both banks and markets.
SRTs and NBFIs
Synthetic risk transfers deepen those pathways by moving first-loss slices from banks to non-banks while leaving banks with senior exposure and capital relief. In practice, the bank originates the loans and then executes a second transaction that passes the junior risk to an NBFI investor. Issuance has emerged – around 85% higher in 1H25 – highlighting both the appeal of relief and Europe's lead over the US given the documentation rules.
Supervisors and the IMF have warned about “circles of risk” when banks invest in or fund the same funds that buy their SRT tranches . The EBA has been explicit about the need to detect whether private-credit funds buying SRTs are financed, directly or indirectly, by the originating banks. In times of stress, illiquid CLNs held with repo leverage can meet margin calls that force deleveraging into thin markets. Evidence of rising hedge-fund repo borrowing – sometimes from the originating bank – adds to concerns about procyclical dynamics. Mapping these crossholdings and funding links is, therefore, a precondition for credible system-wide risk assessment.
The US: NBFIs and private credit
In the US, bank balance sheets increasingly reflect lending to NBFIs rather than traditional C&I borrowers . NBFI loans now account for more than a tenth of total bank loans, with outstanding exposures surpassing about USD1trn by end-2024 after a decline of rapid growth. This shift mirrors the regulatory and funding changes that enabled insurers, private-credit funds and BDCs to step in as direct lenders. Because these lenders lack deposits, many finance themselves partly through banks, thus tightening bilateral dependence.
NBFI lenders might be less willing to restructure debt, since many may have operational experience. Conversely, they could be more open to granting more payment-in-kind (PIK) interest features that give borrowers additional breathing room to ease cash-flow pressure, which might delay (or even prevent) some credit losses, although the eventual recovery rates could be lower as a result.
A report from valuation firm Lincoln International, the percentage of loans valued by Lincoln with some sort of PIK rose to 11.4% in the second quarter from 6% in 2022. Furthermore, the wall of PIK maturities in the next years raise the risk of an increase in debt restructurings as companies return to cash interest payments . We believe it will take at least one credit cycle before more information becomes available about the differences in lender behavior towards distressed entities.
Structurally, banks often take senior, diversified exposures with hefty collateral, qualifying for risk weights as low as 20% versus the 100% typical of C&I. These parameters can lift ROE from roughly 10% on vanilla C&I to around 30% on some NBFI loans, making the economics compelling. The trade-off is a narrower client base and deeper links to leveraged ecosystems whose behavior during periods of stress may differ from corporates. Therefore, while systemic risk looks limited today, it will grow with leverage, cyclicality and the potential for correlated shocks .
What US banks say about private credit
Recent management comments from large US banks paint an optimistic picture, emphasizing collateralisation, diversification and investment-grade-like attachment points across NBFI books . Goldman Sachs frames recent fraud-related losses at certain regions as isolated and remains upbeat on private-credit borrowers. Citi highlights loan-level transparency, concentration limits and structural protections in its NBFI portfolio. JPMorgan says the risk profile is comparable to other lines, even as CEO Dimon cautions that a real downturn could expose fragilities. Wells Fargo
describes a plain-vanilla, cross-collateralized book spanning consumer receivables, supply-chain and vendor finance. PNC points to low PD and LGD on securitised receivables and a spotless record on capital-commitment facilities. Bank of America stresses credit enhancement, performance triggers and mark-to-market features alongside short duration. However, the events at Tricolor and First Brands – and redemption pressure at the Point Bonita fund (managed by Jeffries) – show that structural protections do not eliminate either failure or contagion.
US banks' deregulation: more to come
A powerful tailwind for US banks is looming deregulation, which could widen the competitive gap with Europe. Estimates discussed in the Financial Times point to roughly USD2.6trn of lending capacity and about USD140bn of capital being freed up by the easing of capital rules. The headline math implies a 14% reduction in CET1 requirements, a 35% uplift in EPS and a 6% rise in ROATCE for large US banks. Community banks may also get relief via a lower community bank leverage ratio, easing constraints for local lending.
By contrast, UK changes look modest, and parts of Europe – notably Switzerland – face flat-to-higher requirements. European policymakers argue against a race to the bottom and preference to raise resilience in NBFIs engaged in bank-like activity. The BoE's Sam Woods (CEO of the PRA) similarly resists diluting leverage rules, noting that even high-rated sovereigns carry real interest-rate risk. The upshot is more capacity and earnings power for US banks alongside a European push to strengthen the links between banks and non-banks.
Conclusion
Europe's pattern of rising NBFI heft and dense bank-to-non-bank links sets the stage for how shocks can propagate across sectors. Liquidity mismatches, derivatives and repo-based leverage mean even minimal direct exposures can transmit outsized moves into core funding markets.
BoE Governor Bailey's warning about private credit fits squarely into this framework, as opacity and stacked leverage make stress hard to spot until it is already spreading. His proposed system-wide exploratory scenario is, in effect, an effort to draw the wiring diagram before the lights flicker.
SRTs complicate the diagram by shifting first-loss risk to funds that may themselves borrow from, or be funded by, the originating banks. If these funds are leveled through repo and hold illiquid CLNs, margin calls can force fire sales and blow back through the same pipelines.
In the US, the economics of lending to lenders – low risk weights and higher ROE – are strengthening the ties between banks and NBFIs. Bank managements stress structural protections, but the failures of Tricolor and First Brands show how quickly confidence can turn to de-risking.
Deregulation could further accelerate US capacity while Europe leans into macroprudential oversight of NBFIs and the bank-to-non-bank interface. Taken together, resilience will hinge on seeing the whole network – warehouses, fund-finance lines, SRT loops and liquidity tool – and aligning policy so local losses do not metastasize into a system-wide event.