Growth in lending to shadow banks is eclipsing other loans.
getty
Two must-read reports — the FDIC Bank Quarterly and the Alvarez & Marsal deregulation primer — reveal how eighteen months of regulatory rollback unleashed an extraordinary surge in bank lending to hedge funds, private credit, and the shadow banking ecosystem, while small businesses and farmers wait in line.
The FDIC’s Bank Quarterly for the first quarter of 2026 and the Alvarez & Marsal Bank Deregulation Primer released this month are essential reading for every bank regulator and every investor holding bank bonds or equities. Together, they document a structural transformation in American banking that has received far too little attention: a deregulatory wave that began in early 2025 has driven banking assets to record highs — but the money is flowing not to Main Street, not to farms, and not to working families. It is flowing, at historic speed, to the shadow banking system.
Private credit continues to grow as does the default rate.
MRV
Since 2010, loans to nondepository financial institutions (NDFIs) that make up shadow banking, including private credit funds, hedge funds, mortgage originators, business development companies, private equity vehicles, and structured finance platforms have grown from $56.3 billion to more than $1.47 trillion. That is a 2,518% increase. No other major lending category came remotely close. Mortgages grew 39%. Commercial and industrial lending grew 112%. Consumer loans grew 50%. Farm loans grew 54%.
BANK LOAN BALANCES BY CATEGORY — 2010 Q1 VS. 2026 Q1
FDIC data
NDFI lending did not merely outpace these categories. It lapped them. Where traditional lending grew in single or double digits over sixteen years, NDFI lending grew more than twenty-five times faster, compounding at roughly 26% per year since 2012 according to Federal Reserve Bank of St. Louis data. By the first quarter of 2026, loans to NDFIs represented a full 10% of total U.S. bank loans, up from less than 1% fifteen years ago.
Year-Over-Year Growth Rates: Q1 2025 to Q1 2026
FDIC Bank Quarterly Data
The Deregulatory Trigger
The Alvarez & Marsal report provides the institutional explanation for why NDFI lending accelerated so dramatically after 2025. The analysis tracks a cascade of regulatory rollbacks — from capital relief for the largest banks to loosened supervisory posture to the single most consequential institution-specific event of the cycle: the Federal Reserve’s removal of Wells Fargo’s asset cap on June 3, 2025.
Wells Fargo had been constrained since 2018, when the Fed imposed a $1.95 trillion asset cap as penalty for the bank’s fake-accounts scandal. During the seven years the cap was in place, JPMorgan Chase grew nearly 60% and surpassed $4 trillion in assets. Bank of America grew more than 40%. Citibank overtook Wells Fargo as the third-largest U.S. bank. One estimate placed Wells Fargo’s lost deposit opportunity at $400 billion — a figure CEO Charlie Scharf publicly endorsed. Following the cap’s removal, Wells Fargo poached more than 125 managing directors from Goldman Sachs and Morgan Stanley, climbed from seventeenth to ninth in global M&A volume within a year, and grew total assets from approximately $1.93 trillion to $2.17 trillion by Q1 2026.
Beyond Wells Fargo, regulators effectively abandoned the original Basel III Endgame capital proposal, which would have raised capital requirements at major banks by roughly 20% and replaced it with a far more permissive framework. By early 2025, the largest U.S. banks had accumulated approximately $200 billion in excess Common Equity Tier 1 capital above regulatory minimums. With the threat of forced capital increases removed, that surplus became immediately deployable. Goldman Sachs estimated U.S. banks could see a 150–200 basis point boost in return on equity compared to European peers still operating under stricter regimes.
Deregulatory Actions: 2025 and 2026
TIMELINE OF MAJOR REGULATORY CHANGES SINCE JANUARY 2025
Public sources
Where the Money Is Not Going
The FDIC’s 2026 Risk Review makes clear that the lending boom is narrowly distributed. Small business loan growth was stagnant throughout 2025, constrained by tight underwriting standards, higher financing costs, and weak demand. Business bankruptcy filings rose 10.6% in the year through November 2025. Farm credit quality is deteriorating — row crop farmers are experiencing a third consecutive year of declining crop receipts, and farm loan delinquency rates have reached their highest levels since 2021. Consumer delinquency rates on credit cards and auto loans remain above pre-pandemic averages. Commercial real estate, particularly office, remains deeply stressed, with the total past-due and nonaccrual ratio ticking up to 1.45%.
NDFI Loans as a Share of Total Banking Assets
FDIC data
Systemic Risk: What Regulators Are Saying
The FDIC’s 2026 Risk Review specifically identified NDFI interconnectedness as a primary systemic risk. The concern runs through a precise contagion scenario: if an economic downturn forces NDFIs to face margin calls, those entities could simultaneously draw down committed bank credit lines while the value of bank-held collateral collapses. Total industry NDFI exposure — loans plus commitments — stood at $2.55 trillion as of Q4 2025, equal to 116% of total industry equity of $2.20 trillion.
Moody’s warned directly that NDFI loans have elevated the risk of losses at U.S. banks, noting that prolonged rapid loan growth often signals elevated asset risk. Signs of stress were already visible in early 2026: Fitch Ratings reported private credit default rates reaching approximately 6%, large funds were gating withdrawals or capping redemptions, and AI disruption was creating stress among software-sector borrowers concentrated in BDC and private credit portfolios.
The structural concern is not that any individual NDFI loan is inherently unsound. It is that leverage is layered: operating companies are already leveraged; private credit funds finance those companies with additional leverage; banks finance the private credit funds; sometimes CLO financing is added on top. This architecture closely resembles the pre-2008 shadow banking system — less transparent, less regulated, highly interconnected, and dependent on continuous liquidity from banks that are themselves leveraged.
Whether this represents a rational reallocation of credit to more efficient intermediaries, a regulatory arbitrage that concentrates systemic risk in less-supervised channels, or something more dangerous — a replay of pre-2008 leverage layering dressed in new language — is the central unresolved question facing bank regulators and investors today. What is no longer debatable is the scale and direction of the shift. Two years of deregulation have produced the fastest growth in NDFI lending on record. The FDIC Quarterly and the Alvarez & Marsal report document precisely what was unleashed. The question of what comes next is now on the table.
Private Equity And Private Credit Debt Levels Should Alarm Regulators
Rising Private Credit Defaults Are Testing Banks And Insurers
Rewriting Banking’s Report Card: The Risks Of Changing CAMELS
Private Credit: Trying To Count The Cockroaches
Fed Warning: America’s Financial System Is Strong But Risks Are Rising
Beyond Bank Runs: The OCC Warns Of A More Complex Financial Threat
Beyond Private Credit—The Overlooked Risks Of Banks’ Ties To Nonbanks
Bank Lending To Private Credit And Non-Banks Is At Historic Highs