U.S. regional banks’ recent losses tied to non-bank financial institutions (NBFIs) may signal broader risk from this fast-growing loan segment, Fitch Ratings says. While these cases may be fraud related and idiosyncratic, rapid expansion of NBFI exposures increases the chance that concentrated counterparties, combined with weak underwriting, could pressure bank earnings and sentiment beyond individually affected banks. 

U.S. bank lending to NBFIs expanded sharply over the last five years, per FDIC data. Loans to NBFIs reached about $1.2 trillion at June 30, 2025, nearly 10% of total loans, up from roughly 3% a decade ago. Growth averaged about 11% annually on a CAGR basis for the entire industry; however, banks with assets between $10 billion and $250 billion in assets grew the fastest at roughly 35% during this period. 

Disclosures from Fifth Third, JP Morgan Chase, Zions and Western Alliance regarding recent incidents point to losses linked to borrowers in consumer credit or commercial real estate (CRE) mortgage warehouse lending. These losses highlight the interconnectedness between the NBFI sector and the regulated banking system, and that weaknesses in the former can created outsized earnings impact in the latter, particularly when exposures are more material for banks. 

For example, Western Alliance’s exposure to a CRE mortgage warehouse loan is $100 million, for which the bank has already initiated a lawsuit alleging fraud. While Western Alliance expects some recovery, it is unclear what the ultimate earnings impact will be, but a full write-off of the CRE warehouse would total approximately 34% of the prior quarter’s earnings. Western Alliance also faces exposure from a separate warehouse loan to First Brands. Additionally, JPMorgan Chase, Fifth Third have recorded losses on to a warehouse loan tied to in the Tri Color bankruptcy, and Barclays reportedly has exposure as well. 

While individual losses of this magnitude may be isolated, the scale and pace of NBFI loan growth heightens the need for tighter underwriting, enhanced borrower due diligence, and strong risk management practices. Collateral management and credit administration are central to containing loss severity in NBFI lending, along with choosing the right sponsor/NBFI counterparty. Robust collateral verification, margining and revaluation practices, coupled with clear covenants and rapid remediation protocols, can prevent slippage from misrepresentations and market-value declines.