The recent bankruptcy of Tricolor, which resulted in significant losses for bank lenders, highlighted how even secured lending to NDFIs can go awry. “Underwriting and collateral controls can fail even when loans are secured,” Moody’s said.
Transparency remains a concern. While new reporting rules require banks with over $10 billion in assets to disclose NDFI exposures, Moody’s noted that “the disclosed categories are still fairly broad and indistinct, and the data is not reported at the consolidated, holding company level.”
Many private credit instruments are illiquid and opaque, with valuations often managed internally, making it difficult for banks and investors to assess true risk.
Banks’ lending to private credit providers, rather than directly to middle-market borrowers, offers some diversification benefit, but this is offset by the incremental leverage and lower transparency at the portfolio company level.
“These evolving dynamics underscore the need for vigilant credit risk management as private credit continues to scale up,” Moody’s said.