Understanding Recent Credit Market Concerns

There's an old saying that criminals rob banks because that's where the money is. Today, though, money isn't only held at traditional banks. It's spread across many different types of financial companies. After the 2008 financial crisis, policymakers wanted to make banks safer. However, this shift has created new challenges. With some recent company failures raising worries about cracks in credit markets, it's helpful for long-term investors to understand what this really means.

Since 2008, a lot of lending has moved to what are called "non-depository financial institutions" or NDFIs. These include private credit funds (investment firms that lend money), mortgage companies, insurance companies, and online lenders. The important point is that these lenders are not traditional banks because they don't take customer deposits. This means they don't follow the same banking rules that traditional banks do. However, regular banks are still connected to these institutions—banks have made $1.2 trillion in loans to NDFIs.¹ Because this system is less transparent, some people call it "shadow banking."

Why is this in the news now? Over the past few months, there have been several cases where specific borrowers were accused of fraud. In September, a subprime auto lender called Tricolor failed after allegedly using the same cars as collateral (security) for multiple loans. Around the same time, an auto parts supplier named First Brands filed for bankruptcy amid concerns about hidden debt.² More recently, fraud allegations emerged against companies called Broadband Telecom and Bridgevoice, based on fake invoices used in lending deals.³

JPMorgan CEO Jamie Dimon recently made a statement that captures investor concerns: "when you see one cockroach, there are probably more." While these individual cases are worrying and have caused brief market swings, the question is whether they signal broader problems in credit markets. Should we compare this to the 2008 financial crisis or the 2023 banking problems? For long-term investors, understanding this difference is important. Managing risk isn't about reacting to every news headline. It's about building a portfolio that can do well even during uncertain times.

Putting today's concerns in historical perspective helps us understand the situation

When credit problems appear, it's natural to think back to 2008 or 2023. During the 2008 financial crisis, some fraud cases did come to light. However, what made that crisis systemic—meaning it affected the entire financial system—wasn't the fraud or even the housing crash by itself. The real problem was that the largest financial institutions had borrowed enormous amounts of money (high leverage). In many cases, they had borrowed more money than they actually owned in equity (the value of their assets minus their debts). This created chaos throughout the financial system.

A better comparison might be the 2023 banking crisis, when several regional banks failed within days of each other. That revealed a different problem: these banks held long-term assets (like bonds) but had short-term liabilities (customer deposits that could be withdrawn quickly). When interest rates rose rapidly, the value of their long-term assets fell while customers withdrew deposits. These banks also had concentrated customer bases—Silicon Valley Bank served many tech startups, while Signature Bank and Silvergate served cryptocurrency companies. This made them vulnerable to problems in specific industries.

While people were concerned at the time, this didn't lead to a broader economic downturn. That said, the 2023 crisis shows how quickly confidence can disappear in modern financial markets before recovering again. As always, these examples show why it's important not to overreact to headlines. The chart above shows both historical credit shocks and the fact that bond yields and spreads (the extra interest paid on riskier bonds) remain stable today.

Credit cycles play a major role in economic ups and downs

Throughout history, credit and debt cycles have often driven the biggest economic expansions and contractions. When the financial system has plenty of money available to lend (abundant liquidity), more credit gets extended to both businesses and individuals. This pattern of lending and borrowing during good economic times has repeated itself across different time periods—from the railroad boom in the 1800s to the roaring twenties a century ago to the housing bubble in the mid-2000s.

However, it's important to understand the difference between the perspective of a large bank and that of long-term investors. For large financial institutions, each loan matters because bad loans can result in write-offs (losses) that hurt quarterly earnings. For investors, what matters is whether these issues are "systemic"—meaning they affect the broader economy and investment portfolios across many different types of investments.

The situation is still developing and there could be more cases of fraud and bad loans. However, markets have already calmed down after the initial bankruptcy reports, and there are several key facts to keep in mind.

First, while the dollar amounts involved are significant for individual institutions, they represent a small portion of the overall financial system. Second, larger banks generally have strong capital positions (plenty of money set aside) and are diversified across many types of lending, which reduces their vulnerability to problems in any single area. Third, unlike past crises, there's no evidence yet of a broader economic problem that would cause widespread credit issues. The chart above shows that the banking system has been more stable over the past two years.

Stock and bond markets have remained relatively calm

Stock and bond markets have experienced brief periods of uncertainty in recent months, driven by tariffs, the government shutdown, financial concerns, and questions around AI companies. Yet during this same period, major stock market indices have continued to reach new all-time highs, while bond returns have also supported balanced portfolios (portfolios that include both stocks and bonds).

For long-term investors, the key lesson is that recent headlines about financial fraud and bankruptcies are a natural part of credit cycles and how financial markets work. While individual cases may be concerning, this is different from whether it affects the broader financial system. Either way, it's clear that lenders will need to make adjustments, especially non-bank lenders.

References

1. https://www.fitchratings.com/research/non-bank-financial-institutions/us-bank-lending-to-non-banks-continues-to-outpace-all-other-types-15-05-2025

2. https://www.bloomberg.com/news/articles/2025-10-31/is-a-private-credit-crisis-brewing-tricolor-first-brands-shake-wall-street

3. https://www.wsj.com/finance/blackrock-stung-by-loans-to-businesses-accused-of-breathtaking-fraud-6de5c3a7

 The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.