Banks Face New Quiz Over $1.7 Trillion in Loans to Bankrupt Firms Linked to Automakers

The near-simultaneous collapse of two companies tied to the U.S. auto industry is shedding new light on a fast-growing part of the financial markets little known outside Wall Street.

Auto-parts maker First Brands, now reorganizing, had complex funding arrangements with private lenders that were themselves financed by banks. (Photo: Summit Racing Equipment)

Banks are lending vast sums to companies that also provide financial services—but aren’t banks in name or regulation, Rebecca Ungarino reported for Barron’s Daily.

Commercial bank loans to these so-called non-depository financial institutions (NDFIs) rose to nearly $1.7 trillion at the end of September—up more than fourfold in a decade, according to the St. Louis Fed.

The figures underscore how years of easy credit have flowed outside the tightly regulated banking system and into riskier enterprises.

NDFIs now account for about 33% of all commercial and industrial loans originated by large banks, J.P. Morgan Securities says. For years, investors cheered this loan growth as a positive for banks. But Wall Street is rethinking that optimism after Tricolor Holdings and First Brands both collapsed.

Tricolor, a used-car dealership operator now in liquidation, extended credit to borrowers while large banks lent it money to do so.

Auto-parts maker First Brands, now reorganizing, had complex funding arrangements with private lenders that were themselves financed by banks.

Jefferies-owned asset manager Point Bonita Capital lent to major First Brands customers including AutoZone, Walmart, and O’Reilly Automotive.

Point Bonita’s portfolio includes roughly $715 million tied to those companies, Jefferies said, adding that it is assessing the asset manager’s exposure to the bankruptcy.

JPMorgan Chase, BlackRock, Barclays, Origin Bank, Renasant Bank, and Triumph Financial are among Tricolor’s creditors.

Fifth Third Bancorp said in a recent securities filing that it expects to lose between $170 million and $200 million on its asset-backed loan to the company.