Banks are now lending over $1 trillion a year to nonbank financial institutions (NBFIs). That’s right—$1 trillion. This is more than double what they were lending just five years ago. This is the kind of reckless behavior that should make you sit up and pay attention. NBFIs include everything from private equity firms, hedge funds, and mortgage lenders, to student loan providers and real estate investment trusts (REITs). These institutions are far less regulated than banks, yet they’re getting their hands on more capital than ever before.
Why are banks doing this? It’s simple—they want the revenue, but they also want to offload risk. By lending to these less-regulated companies, banks can theoretically avoid taking on the risk of default. They’re hoping these NBFIs will use that cash to lend to other companies, which will then cycle back and generate profits. Sounds great in theory, right? But in practice, this is a recipe for disaster.
The problem here is that NBFIs are not as transparent or as accountable as traditional banks. And when they’re borrowing this much money, there’s no telling where it ends up. At best, these loans fund risky ventures with an even riskier upside. At worst, we’re looking at a massive house of cards waiting to collapse.
And here’s the kicker—we’re getting looted. The system is on the brink, and no one seems to care. These high-yield spreads, which were once a key indicator of economic stability, are now looking like an afterthought. What we’re seeing here is a train wreck in the making, one that could take down more than just a few firms.
This is no small matter. Leveraged loans have already started to break down, and junk bonds are starting to show signs of stress. The early warning signs of credit deterioration are here, and they’re becoming clearer by the day. It’s all connected. These loans, these bonds—they’re all part of a system that’s far too fragile to withstand any serious pressure.
I’ve said it before, and I’ll say it again: A blowout in credit spreads is one of the most underappreciated risks in the market today. People are talking about inflation, about the Fed, about unemployment, but this? This could be the real problem that brings the whole house of cards crashing down. The financial system is being propped up by increasingly unstable foundations, and it’s only a matter of time before it all comes undone.
Sources:
https://x.com/MichaelMOTTCM/status/1905370260640821627
https://x.com/TaviCosta/status/1905245837631906159