Experience Stern | Faculty & Research

Do the recent stresses in the NBFI space—notably the bankruptcies of Tricolor and First Brands, and the decision of Blue Owl Capital Corp II (OBDC II) to end its redemption program and return capital through a wind-down of the fund—create distress for banks? The general sentiment is that the recent stresses are unlikely to amount to systemic concerns, although it does not mean there might not be “some stress and strain” for banks and that policymakers are “watching carefully” for exposure across banks. In a series of previous posts, we showed that shocks to nonbank financial institutions (NBFIs) directly impact banks that have exposures to NBFIs. In this post, we show that bank stocks have been directly impacted by NBFIs yet again. In short, NBFI troubles do result in “stress and strain” for banks.

NBFIs have grown rapidly since the financial crisis of 2007-09 and now constitute more than 50 percent of total global financial assets. In addition, in the U.S., bank lending to NBFIs seems to have accounted for all of the bank lending growth in 2025. Indeed, banks’ credit exposures to the broader NBFI sector are quite large and diffuse. From publicly available regulatory filings as of year-end 2025, there were about fifty bank holding companies with total credit exposures (that is, on-balance sheet loans and undrawn commitments) to NBFI obligors that exceeded 100 percent of their Tier 1 equity capital, with the more extreme exposures being 4 to 6 times as much. Notably, many of these institutions are regional banks (that is, they have assets of $10-100 billion).

We have argued in several pieces, from April 2024 to more recently, that NBFI growth should be viewed not as migrations of intermediation activities from banks to NBFIs, but as transformations of activities. The transformations are at least in part motivated by regulatory arbitrage, in which NBFIs retain junior credit exposure to borrowers while banks extend senior loans and contingent credit lines to NBFIs. Furthermore, we have shown empirically that the NBFI and bank sectors have become more intertwined since the financial crisis, and that shocks to NBFIs do spill over to banks, particularly through the NBFI drawdowns of bank credit lines.

Read the full Liberty Street Economics article.

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Viral V. Acharya is the C.V. Starr Professor of Economics in the Department of Finance at New York University Stern School of Business. Bruce Tuckman is a Clinical Professor of Finance at New York University Stern School of Business.