Behind Wall Street’s Big Banks’ Stellar Third-Quarter Reports: Soaring Non-Bank Lending Fuels Bubbles and Sows Market Concerns

Behind Wall Street’s Big Banks’ Stellar Third-Quarter Reports: Soaring Non-Bank Lending Fuels Bubbles and Sows Market Concerns

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On Tuesday, financial reports released by major Wall Street banks—Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo—showed that trading and investment banking businesses performed strongly in the third quarter, with some growth in lending business as well:

  • JPMorgan Chase reported record quarterly revenue from its combined equities and fixed income trading businesses; Goldman Sachs and Citigroup also achieved their best third-quarter performance in years.
  • An active IPO market and a rebound in M&A advisory fees boosted consulting and capital markets revenues for multiple investment banks reporting results, reaching the highest levels since the end of 2021, which was the frenzy period on Wall Street following the COVID-19 pandemic. Goldman Sachs’ investment banking revenue grew 43% year-on-year to $2.66 billion; Citigroup and JPMorgan Chase increased by 17% and 16%, respectively.
  • Corporate and household balance sheets overall remain robust, but demand for ordinary corporate loans and home mortgages remains weak. Though there are some issues—such as JPMorgan Chase confirming a $170 million financing loss linked to the bankrupt auto lender Tricolor—these risks are mostly concentrated among heavily indebted companies and low-income consumers.

Notably, an increasing number of large banks are turning to provide financing to non-bank lending institutions and asset management companies. The recent surge in lending to non-bank financial institutions has attracted the attention of analysts and investors:

These types of institutions are currently more focused on frequently trading assets in the market, rather than providing new financing activities for the real economy. While most major banks do not separately disclose loan income from hedge funds or asset management companies, Goldman Sachs’ results offer some clues—the revenue of its prime brokerage division grew about one third year-on-year, setting a quarterly record for the business.

Recently revised Federal Reserve data indicate that U.S. bank loan growth this year has come entirely from lending to non-bank institutions. These borrowers now account for 13% of banks’ total outstanding loans.

JPMorgan Chase CEO Jamie Dimon has been repeatedly asked about the risks of banks lending to non-bank institutions. He pointed out that this area encompasses a range from high-risk subprime lending and high-yield private credit to loans backed by investment-grade assets, as well as financing activities for trillion-dollar fund management companies, with varying levels of risk. Dimon warned:

There is a lot of “regulatory arbitrage” outside the banking system, and when the economy turns down, bad loans will be exposed.

We’ve been in a very loose credit environment for too long. I think once a downturn hits, credit quality outside the banking system could deteriorate much more than people expect.

Meanwhile, the Federal Reserve is preparing to cut interest rates in the coming months and may lower capital requirements for banks:

The Fed plans to revise the calculation method for the Supplementary Leverage Ratio (SLR), further enhancing banks’ ability to issue the above categories of loans and expand prime brokerage and bond financing businesses, channeling more money into potentially bubbly markets.

Executives also hope the Fed and other regulators will further relax the rules, releasing more capital so banks have room to take on higher risk or return more cash to shareholders—who would then need to find new assets to invest in. According to Alvarez & Marsal’s forecast this week, U.S. regulatory easing could release nearly $140 billion in capital requirements for banks—about half of JPMorgan Chase’s current capital. Although this estimate is quite optimistic, it underscores the potential extent of regulatory relaxation.

Meanwhile, moves by U.S. President Trump to influence the Fed have led the market to expect that interest rates may be cut by a full percentage point by next summer.

At present, U.S. stocks are surging, and corporate borrowing costs are close to risk-free rates. Some analysts warn that as concerns about an “AI-driven market bubble” continue to intensify, the Fed must be especially careful not to add unnecessary fuel to the financial fire.

Some fear that U.S. economic growth will slow next year, the labor market is softening, and the Fed’s future rate cuts may drive up asset prices rather than address uncertainties from trade and tariffs, which are causing corporate leaders to hesitate on new investments.

Media analysis suggests that as U.S. regulators revisit banking rules, they should seek ways to encourage banks to create credit for the real economy rather than generate more financial bubbles. Regulatory relaxation for its own sake must be avoided, as it could overheat the financial system and lay the groundwork for even more severe crises in the future.

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