US banks aren’t turning their backs on corporate credit. They’re just shifting how they deliver it. Instead of writing loans directly to companies, they’re increasingly lending to non-bank financial institutions—what we used to call shadow banks—who then go out and do the actual lending.
It sounds circular, but it makes perfect sense when you understand the rules of the game. Banks operate under capital requirements that force them to hold more capital against riskier assets. Lending to a business often gets a 100 percent risk weight. Lending to a structured pool of diversified loans managed by a private credit fund can come in at just 20 percent. That means for every dollar lent to a shadow bank, the hit to a bank’s capital ratios is far smaller than if they’d lent directly to a company.
Think of it like subcontracting. If you’re running a factory and regulators say every new worker you hire comes with a pile of safety inspections and insurance costs, you might just hire a contractor instead. The contractor still gets the job done, but you avoid the regulatory drag. That’s what banks are doing with NBFIs—they’re lending to lenders, and letting those lenders take the regulatory and credit risk head-on.
According to Barclays, this indirect lending has ballooned over the past decade, crossing $1 trillion and now representing over 10 percent of all US bank loans. That figure likely undercounts the true scale, because it doesn’t include synthetic risk transfers—derivative deals that allow banks to hedge credit risk without showing it as a loan on their books. These are effectively credit swaps dressed in regulatory-friendly clothing. They don’t show up in the same data, but they do the same thing: offload credit risk while keeping the revenue.
If this feels reminiscent of the pre-2008 era, you’re not alone. Back then, banks used securitizations and credit default swaps to game capital rules and reduce apparent risk. Eventually, all that hidden leverage came home to roost. Today’s system is different in key ways—there’s more capital in the system, recovery rates on corporate loans are better than on subprime mortgages, and many NBFIs have real skin in the game. But the logic of regulatory arbitrage is the same.
And that’s what makes this trend so important. Shadow banks aren’t subject to the same constraints as traditional banks. They can take on more leverage, use off-balance-sheet financing, and stretch into riskier territory. And now that banks are providing the leverage to these players, the line between regulated and unregulated finance is getting blurrier.
It’s not that banks are making worse decisions. On the contrary, they’re responding rationally to a system that incentivizes capital efficiency over transparency. But as NBFI lending grows, the amount of systemic leverage grows with it. The risk doesn’t go away—it just migrates. And the more leverage there is in the system, the smaller the shock needed to trigger a wave of losses.
No one is saying we’re heading for a repeat of 2008. But the setup is starting to rhyme. Back then, mortgage-backed securities offered low risk weights and high yields, until housing prices turned. Today, it’s corporate credit with low loan-to-values and heavy structuring. As long as the music keeps playing, the loans will look safe. The question is what happens when it stops.
So the next time you hear that banks are lending less, remember—it’s not that they’ve stepped back from corporate credit. They’ve just handed the baton to someone else. And they’re still very much in the race.
