Stress and Strain from NBFIs to Banks

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

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.

The Bank-NBFI Interaction

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.

Turbulence in both the NBFI and banking sectors over the last several quarters provides an opportunity to revisit our analysis. Most notably, in September 2025, several NBFIs (for example, collateralized loan obligations; asset-backed securities; trade finance funds; warehouse lenders; business development companies (BDCs); and other private credit funds) were shaken by the Tricolor and First Brands bankruptcies. These bankruptcies raised broad concerns about credit quality throughout the sector and, more narrowly, drove listed BDCs to trade at a discount and sparked significant and widely publicized redemption requests from some non-traded BDCs. And, at the end of January 2026, Anthropic’s launch of artificial intelligence (AI) automation tools for legal and related business tasks intensified concerns about the credit quality of software-sector loans. Over the same period, bank stocks fluctuated in a wide range.

To what extent did shocks to NBFIs spill over to banks with exposures to NBFIs, despite the seniority of bank claims and credit lines? The chart below compares the cumulative return in asset-weighted average stock prices of banks that have high exposures to NBFIs with those that have low exposures. The returns are normalized to zero on February 17, 2026, the day before OBDC II’s announcement mentioned earlier, a negative news event in the NBFI space. The average stock returns for the more exposed banks are below those with low exposure, and the gap seems persistent over many days. This evidence supports the idea that banks with greater exposure to NBFIs were more adversely affected by these credit market stresses.

Of course, correlation does not necessarily imply causation. It may be that the banks with high exposures to NBFIs and the NBFIs themselves are exposed to a common set of risk factors that induce a correlation between bank returns and NBFI distress.

To lend better support to the proposition that NBFI distress might be causing bank distress, we do the following.

• First, we focus on NBFI and bank distress around multiple recent events: the sudden bankruptcy filing of Tricolor on September 10, 2025; the bankruptcy filing of First Brands, with word spreading around September 22, 2025; and the event used in the chart above, Blue Owl’s announcement about its OBDC II fund on February 18, 2026.
• Second, we regress each bank’s stock return on the S&P 500 return index.
• Third, we calculate each bank’s daily, abnormal return—that is, the difference between the stock return and the predicted return from the above market regression. Note that, by construction, these abnormal returns are after accounting for any market-wide, common factors driving the performance of both banks and NBFIs.
• Fourth, we calculate cumulative abnormal returns (CAR) for each bank as the sum of its abnormal returns from five days before to five days after each of the three event dates we consider.

Finally, we estimate cross-sectional regressions of these CARs on our metric of banks’ NBFI exposure, controlling for bank-specific characteristics, such as their total asset size and Tier 1 ratio, as reported by banks at the end of the quarter before each event date. 

We report the results of these regressions in the table below. The first three columns provide the estimates for each of the three events, while the fourth column shows the results of a regression where we pooled the three events together.

Summing Up

Why do exposure to NBFIs drive bank stress? A relatively benign possibility is that NBFI difficulties foreshadow reduced bank earnings. As mentioned earlier, bank lending to NBFIs has grown substantially and loans to NBFIs are particularly profitable. Because of their seniority these loans receive favored capital treatment. Another possibility is that NBFI drawdowns on credit lines are likely to be correlated with each other and with broader demands on bank liquidity, which could stress bank resources, including bank capital against drawn down balances. Finally, the most worrisome possibility is that NBFI losses in extreme scenarios result in actual bank losses on loans and credit lines, despite their seniority, either directly or through markdowns of assets falling in value due to fire sales or impairment.

Although the precise mechanism by which NBFI distress spills over to banks is a subject for future research, the resulting “stress and strain” for banks seems to be an empirical regularity that should be of interest to investors and regulators.

Viral V. Acharya is a professor of finance at New York University Stern School of Business.

Nicola Cetorelli is head of Financial Intermediation in the Federal Reserve Bank of New York’s Research and Statistics Group. 

Bruce Tuckman is a professor of finance at New York University Stern School of Business.

 
@article{AcharyaCetorelliTuckman2026,
    author={Acharya, Viral V. and Cetorelli, Nicola and Tuckman, Bruce},
    title={Stress and Strain from NBFIs to Banks},
    journal={Liberty Street Economics},
    note={Liberty Street Economics Blog},
    number={May 8},
    year={2026},
    url={https://doi.org/10.59576/lse.20260511}
}