Non-depository financial institutions (NDFIs) have become a powerful force in U.S. credit markets—and a growing area of exposure for banks. As of Q1 2025, banks held $1.14 trillion in loans to NDFIs, according to the St. Louis Fed, with nearly half of that tied to mortgage and private credit intermediaries. The relationships can be profitable. At the same time, a rigorous approach to due diligence is important for banks to realize their full value.
How We Got Here
For the past decade, bank lending to NDFIs has grown about 26% annually, fueled by the regulatory environment, investor demand, and favorable financial conditions. Former Federal Reserve Bank of Dallas Vice President of Supervision Jill Cetina, now with Texas A&M’s Mays Business School, explained that the 2013 leveraged lending guidance limited banks’ direct exposure to risky corporate borrowers, but it did not prevent banks from lending to NDFIs that then loaned funds on “to the same higher-risk obligors.”
Institutional investors such as pension funds seeking higher yields also helped NDFIs find their footing. Over time, NDFIs “found markets for the leveraged corporate credit assets that they originated with insurers and pensions, and found funding and partnerships with banks,” Cetina told ProSight.
Recently, that tailwind has started to fade. “The calculus on corporate NDFI asset-liability management is worsening,” Cetina noted, as rates and liquidity conditions shift.
Managing the Risks
Cetina cautioned that NDFIs aren’t regulated like banks, and their lending standards vary widely. “It is crucial that banks deeply understand NDFIs’ underwriting, credit monitoring, and workout processes,” she said.
She also pointed to valuation and exposure concerns. Private-market assets are often described as “high and stable,” but public market indicators—such as falling business development corporation (BDC) stock prices—suggest potential credit downgrades ahead. And beyond the $1.14 trillion in loans already made, banks also face over $900 billion in undrawn credit commitments to NDFIs.
What Banks Can Do
Banks looking to reduce exposure should “review their loan documentation to determine the strength of material adverse change and other covenants.” Those maintaining relationships should stress-test for higher drawdowns if “the NDFI asset distribution channel becomes clogged.”
Finally, recent fraud allegations at a handful of NDFIs underscore the importance of collateral diligence. NDFIs “seem to have tried to take a lot of collateral,” Cetina said, but in some cases “their due diligence on the collateral has demonstrated some notable weaknesses.”
Bottom line: NDFIs are reshaping credit markets— for banks, understanding how these counterparties lend, fund, and collateralize risk is more important than ever.
