How exposed are banks to business loans made by nonbank lenders? Not very

Nonbank lenders have done a growing amount of business lending in recent decades, but some of their funding comes from traditional banks, raising concerns about whether banks could face losses if those nonbank lenders run into trouble.

But banks’ indirect exposure to business loans made by nonbanks is small relative to their direct business loan holdings, according to an estimate published in new Cleveland Fed research.

In 2024, an estimated 6.1 percent of all business loans were made by nonbank lenders but indirectly funded by banks. That share has mostly remained in the 5 to 6 percent range over the prior 20 years.

“This amount is small when viewed as a share of total business lending and does not compensate fully for the decline in direct bank balance sheet lending to the business sector in recent decades,” writes Cleveland Fed economist Jan-Peter Siedlarek.

The estimated 5 to 6 percent range could be considered an “upper bound” of the risk nonbank business lending poses to banks. That’s because banks typically provide nonbank lenders with debt financing, which must be paid back before equity investors are paid. So the equity investors would absorb any losses first.

The report also describes the gradual shift from bank to nonbank lending to the business sector: Banks were directly responsible for 47.1 percent of business lending in 2024, down from 56.7 percent in 1980. Meanwhile, nonbank lenders’ share was 37.4 percent in 2024, up from 28.8 percent in 1980.

Read the Economic Commentary: How Much Nonbank Business Lending Is Indirectly Funded by Banks? Some Evidence from a New Data Set