Regional Banks Demonstrate Caution with Loans to Non-Bank Financial Institutions
While lending to non-banking financial institutions (NBFIs) has surged nationally since 2009 – growing at a compound annual rate of 21.9 percent, according to FDIC research – banks in the Eleventh Federal Reserve District are exhibiting more restraint. This trend comes amidst growing scrutiny of the private credit market, fueled by recent bankruptcies of companies reliant on this type of financing.
The Rise of Private Credit and Systemic Risk
The private credit market is expanding rapidly, potentially reaching 15 percent of the fixed-income investment market, as indicated by a Bloomberg Intelligence survey. However, recent high-profile bankruptcies – including First Brands and Tricolor Auto – have raised concerns about the opacity and potential risks within this sector. These failures led to asset write-downs for several banks and a 5-15 percent drop in share prices for many regional banks in October 2025.
Eleventh District Banks: A Different Approach
The Federal Reserve Bank of Dallas examined loan trends among state-member banks (SMBs) within the Eleventh District. Findings reveal that these banks hold fewer NBFI loans compared to their peers in other Federal Reserve districts. National SMB holdings of NBFI loans increased 26 percent between the four quarters ending in the third quarter of 2025, reaching $908 billion. In contrast, Eleventh District SMBs saw a more modest increase of 12 percent, from $15.6 to $17.5 billion.
Who are NBFIs?
Non-banking financial institutions encompass companies providing financial services without full banking licenses. Common examples include insurance companies, pension funds, and mortgage companies. Loans to private credit firms fall under this broader NBFI loan category.
Mortgage Credit Dominates Eleventh District NBFI Lending
A deeper dive into NBFI loan types reveals that, within the Eleventh District, approximately 60 percent of these loans are directed towards mortgage credit intermediaries. This contrasts with the national average of around 25 percent. These intermediaries typically originate mortgages for distribution through government agencies like Fannie Mae and Freddie Mac, generally posing a lower credit risk.
Past-Due Rates: A Mixed Picture
While past-due rates on NBFI loans in the Eleventh District have historically been higher than the national average, they have been trending downwards. As of the third quarter of 2025, the percentage of Eleventh District NBFI loans at least 30 days past due stood at approximately 0.3 percent, compared to a national average of around 0.6 percent earlier in the year. However, these delinquency rates are concentrated within a small number of banks, with two SMBs holding over 90 percent of the past-due loans in the district.
Data Gaps and Future Monitoring
Despite improvements in Call Report data, some key information remains unavailable. Analysts currently cannot examine past-due rates by loan sub-type, assess the profitability of NBFI loans relative to other loan types, or identify individual NBFI loans issued by each bank. This limits the ability to fully assess potential risks and exposure.
According to Federal Reserve Economic Data, the national delinquency rate on business loans from commercial banks in the third quarter of 2025 was roughly 1.3 percent, significantly higher than the Eleventh District NBFI loan past-due rate.
FAQ
Q: What are NBFIs?
A: Non-banking financial institutions are companies that offer financial services without being fully licensed banks, such as insurance companies and pension funds.
Q: Why are regional banks being cautious about NBFI loans?
A: Recent bankruptcies of companies using private credit financing have raised concerns about risk and potential systemic issues.
Q: Is the private credit market a threat to the financial system?
A: The rapid growth and relative opacity of the private credit market are drawing increased scrutiny from regulators and analysts.
Q: What is the Eleventh District?
A: The Eleventh Federal Reserve District is headquartered in Dallas and includes Texas, New Mexico, and Louisiana.
Did you know? Eleventh District SMBs have the third-highest percentage of banks making *some* NBFI loans, even though the overall portfolio size is smaller than in other districts.
Pro Tip: Banks should prioritize strong underwriting standards and continuous monitoring of their private credit lending activities to mitigate potential losses.
Explore more insights into banking trends and financial stability on the Federal Reserve Bank of Dallas website.
