By Rebecca Ungarino

The near-simultaneous collapse of two companies tied to the U.S. auto industry is shedding new light on a fast-growing part of the financial ecosystem little known outside Wall Street. Banks are lending vast sums to companies that also provide financial services -- but aren't banks in name or in how they are regulated.

Commercial bank loans to these so-called non-depository financial institutions, or NDFIs, rose to nearly $1.7 trillion at the end of September, up more than fourfold from $366 billion in September 2015, according to the Federal Reserve Bank of St. Louis. That expansion crystallizes the yearslong flow of credit outside the tightly regulated banking system and into riskier, more opaque businesses.

NDFIs now account for some 33% of all commercial and industrial loans originated by large banks, according to J.P. Morgan Securities. For years, investors cheered on the loans, content to see any loan growth for U.S. banks. But Wall Street is reassessing in the wake of two company failures this fall: Tricolor Holdings, a Dallas-based chain of used-car dealers, and First Brands, a big auto-parts company.

Banks' lending to NDFIs has evolved into an area where investors are "assessing potential future risk rather than solely focused on contribution to growth, given the spate of recent high-profile bankruptcies," UBS analyst Erika Najarian wrote this week.

Tricolor and First Brands are part of the broader NDFI lending web in different ways. Tricolor, which filed for liquidation under Chapter 7 of U.S. bankruptcy code, is considered a nonbank financial firm because it extended credit to borrowers. Big banks lent it money to do so. First Brands, which filed for Chapter 11 bankruptcy protection late last month, sold auto parts, not financial services. But it had complex funding arrangements with private lenders that were in turn funded by banks.

A disclosure on Wednesday from Jefferies, the investment bank, shows the complex web of relationships between banks and private lenders.

The Jefferies-owned asset manager Point Bonita Capital lent to large First Brands customers including AutoZone, Walmart, and O'Reilly Automotive. Point Bonita's portfolio has some $715 million tied to those companies, Jefferies said, noting it is working to determine the asset manager's exposure to the bankruptcy.

A separate investment firm affiliated with Jefferies owns $48 million of First Brands' term loans in its collateralized loan portfolio, Jefferies said Wednesday.

Morgan Stanley analysts estimate Jefferies faces up to $45 million in total losses.

"NDFIs are a diverse group: subprime auto lenders such as Tricolor that participate in the real economy, but also broker-dealers, hedge funds, and securitization vehicles that participate in the financial sector," says Adam Josephson, the founder of Sakonnet Research and a former sell-side analyst at KeyBanc. "What's apparent is that financial sector leverage is growing by the month and is at record highs in many cases, including margin debt, repo lending, and hedge fund borrowing."

Private credit funds, real estate investment trusts, insurance firms, and mortgage lenders are all NDFIs, sometimes also called nonbank financial institutions, or NBFIs. These hard-to-track loans fall outside systems that regulators can track to assess where risk is concentrating.

The new worries about NDFIs' links to the banking system come just as investors are about to get more data on those investments under rules that U.S. regulators set in motion in 2023.

The coming disclosures could give investors a better handle on banks' exposure to NDFIs, but they could also raise new questions about the quality of assets on their balance sheets.

Hunter Doble, a portfolio manager at Hotchkis & Wiley in Los Angeles who specializes in financial services firms, recently said he has been monitoring the rapid growth of banks' lending to nonbanks. It's a topic "we ask about in nearly every meeting we have with bank management teams, " Doble said.

The three primary U.S. bank regulators -- the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. -- proposed new reporting requirements in 2023 and finalized them in 2024. Banks must comply with the new guidelines this year, which has led to a sweeping reclassification of banks' commercial loans -- reflecting more lending to NDFIs than was previously understood.

As banks and asset-management firms start to report third-quarter earnings next week, they'll likely face questions about NDFIs.

JPMorgan Chase, BlackRock, Barclays, Origin Bank, Renasant, and Triumph Financial are among Tricolor's creditors. Fifth Third Bancorp, another creditor whose disclosure last month prompted scrutiny on Tricolor, said in a securities filing on Sept. 9 that it expected to lose between $170 million and $200 million on its asset-backed loan to the auto company.

Tricolor was the subject of a 2022 Barron's investigation that raised questions about the company's lending practices. Tricolor worked with undocumented borrowers with little or no credit history, and precisely what went wrong remains unclear. As part of Fifth Third's disclosure in early September, Chief Executive Officer Tim Spence said his team discovered "significant fraud" at a commercial borrower, which was soon identified as Tricolor.

Spence said it was an isolated event that would hit an otherwise healthy quarter. A few weeks later, his firm struck a major deal in which the Ohio-based bank said it would buy Comerica, a bank that faced calls from investors to sell itself, in the largest bank merger of 2025.

Fifth Third has aimed to de-emphasize its NDFI exposure. In an investor presentation it released with its disclosure about the alleged fraud it found in September, the lender said it has "among the lowest NDFI concentration relative to peers."

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 08, 2025 14:25 ET (18:25 GMT)

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