Understanding Recent Credit Market Concerns: What Investors Should Know

Chris
November 13, 2025

You may have heard the old saying that criminals rob banks because that’s where the money is. But today’s financial world works differently – money isn’t just held in traditional banks anymore. It’s spread across many different types of financial companies. After the 2008 financial crisis, policymakers tried to make traditional banks safer. However, this shift has created new challenges. Some recent company bankruptcies have caused investors to worry about problems in the credit market. It’s important for long-term investors to understand what these concerns really mean.

Since 2008, a lot of lending has moved away from traditional banks to what are called “non-depository financial institutions” (NDFIs). These include private credit funds, mortgage companies, insurance companies, and online lenders. The main difference is that these lenders don’t take deposits from customers like banks do, so they don’t follow the same banking rules. But traditional banks are still connected to these lenders – in fact, banks have loaned $1.2 trillion to NDFIs.¹ This setup makes the financial system harder to see into, which is why it’s sometimes called “shadow banking.”

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

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

Looking at past crises helps us understand today’s situation

When credit problems appear, it’s normal to think back to 2008 or 2023. While some fraud cases were discovered during the 2008 financial crisis, what made it so widespread wasn’t just these cases or the housing crash. The real problem was that the largest financial institutions had borrowed too much money (high leverage). In many cases, they had borrowed more than the value of what they owned (equity), which caused chaos in the financial system.

A better comparison might be the 2023 banking crisis, when several regional banks failed within days. That revealed a different problem: these banks owned long-term assets (like bonds) that lost value when interest rates rose quickly, while their customers could withdraw deposits at any time. These banks also had concentrated customer groups – tech startups for Silicon Valley Bank and cryptocurrency companies for Signature Bank and Silvergate. 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 – and how quickly it can return. 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 (returns) and spreads (the difference between riskier and safer bonds) are still 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 there’s plenty of money flowing through the financial system, more credit gets extended to businesses and individuals. This pattern of lending and borrowing during good times has repeated itself across different eras – 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 how large banks view this and how long-term investors should view it. For large financial institutions, each bad loan matters and can hurt their quarterly earnings. For investors, what matters is whether these issues are “systemic” – meaning they affect the broader economy and portfolios containing a variety 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 a few key facts to remember.

First, while the dollar amounts involved are significant for individual institutions, they represent a small portion of the overall financial system. Second, larger banks are generally well-capitalized (meaning they have enough money set aside) and spread their lending across many categories, reducing their risk from problems in any single area. Third, unlike past crises, there’s no evidence yet of a broader economic challenge that would cause widespread credit problems. The chart above shows that the banking system has been more stable over the past two years.

Stock and bond markets have stayed relatively calm

The stock and bond markets have experienced brief periods of uncertainty in recent months, driven by tariffs, the government shutdown, financial concerns, and questions about AI companies. And yet, during this time, major stock market indices have continued to reach new all-time highs, while bond returns have also helped balanced portfolios.

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, especially non-bank ones, will need to make adjustments.

The bottom line? Recent credit problems among private lenders have raised concerns, but markets have also calmed down in recent weeks. For long-term investors, these challenges highlight the importance of managing risk by aligning portfolios with long-term goals.

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

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