Private Credit Risk Exposure and Systemic Vulnerabilities in Non-Bank Lending Markets

The collapse of First Brands Group in late September 2025 has sent shockwaves through private credit markets, exposing vulnerabilities in non-bank lending structures and reigniting debates about systemic risk. With liabilities exceeding $50 billion and assets valued at just $1–10 billion, the auto parts manufacturer's failure was fueled by opaque financing mechanisms, including invoice financing, reverse factoring, and securitized debt, according to a a CNBC report. Major financial institutions, including Jefferies' Leucadia Asset Management and UBS O'Connor, now face losses exceeding $1.2 billion due to their exposure to First Brands' collateralized loan obligations (CLOs) and private credit funds, according to a CapWolf analysis. This crisis mirrors historical parallels such as the 2008 subprime mortgage collapse and the 2021 Greensill Capital implosion, both of which involved complex, poorly understood financial engineering, as discussed in an Accredited Insight article.

The Rise of Non-Bank Lending and Systemic Risks

Non-bank financial institutions (NBFIs) now dominate corporate financing, accounting for 85% of U.S. leveraged buyout financing in 2025, up from 64% in 2019, according to an ABF Journal analysis. This shift is driven by covenant-lite loan structures and tailored terms that cater to private equity and middle-market companies. However, the rapid growth of non-bank lending has outpaced regulatory oversight. By 2025, non-banks held 75% of total financial intermediation in the U.S., yet many operate with minimal transparency compared to traditional banks, according to a Brookings analysis.

The interconnectedness between banks and non-banks further amplifies risks. For example, the four largest U.S. banks-JPMorgan Chase, Bank of America, Wells Fargo, and Citibank-accounted for 47.8% of all non-depository financial institution (NDFI) exposure in Q4 2024, with Wells Fargo alone holding $158 billion in NDFI loans, according to an S&P Global report. This interlinkage creates a feedback loop: banks lend to non-banks, which in turn rely on securitized debt markets to recycle capital. When a major borrower like First Brands defaults, the ripple effects spread through CLOs, private credit funds, and even traditional banking balance sheets, as noted in a Reuters Breakingviews column.

Opaque Structures and Contagion Risks

First Brands' collapse underscores the dangers of opaque financing. The company's liabilities were largely hidden in off-balance-sheet arrangements, with 30% of UBS O'Connor's exposure tied to invoice financing, according to the CNBC report. Such structures obscure true risk profiles, making it difficult for lenders to assess credit quality. According to a Fitch Ratings report, while the default does not signal broader systemic risk for direct lending, it highlights the need for greater transparency in structured finance products.

The private credit market, now valued at $1.7 trillion in the U.S., has become a critical transmission channel for systemic shocks, according to a Harvard Kennedy School paper. In a stress scenario, declining asset valuations and covenant-lite loan defaults could trigger a cascade of losses. Over one-third of non-bank loan borrowers already operate with negative cash flows, exacerbating fragility, as noted in the ABF Journal analysis. This dynamic is compounded by the lack of standardized risk evaluation and liquidity in private credit markets, according to a Fitch Ratings study.

Regulatory Responses and the Path Forward

Regulators are scrambling to close gaps. In May 2025, the FDIC mandated detailed disclosures for banks with over $10 billion in assets on their NDFI lending, while the Financial Stability Board (FSB) launched a global initiative to monitor NBFI leverage and interconnectedness, outlined in an FSB report. These measures aim to enhance transparency but face challenges in enforcement. For instance, CLOs-structured vehicles that distribute risk across investor tranches-remain largely unregulated, creating a "black box" effect, as discussed in the Accredited Insight article.

Investors must also reassess risk management practices. As noted by the Harvard Kennedy School, private credit's systemic importance has grown due to its network connectivity and role in private equity transactions. This necessitates stricter due diligence, stress testing, and diversification strategies to mitigate contagion risks.

Conclusion

The First Brands collapse is a wake-up call for private credit markets. While immediate systemic risk remains low, the event exposes long-term vulnerabilities in non-bank lending. Investors and regulators must prioritize transparency, enhanced oversight, and stress resilience to prevent future crises. As the sector continues to evolve, the balance between innovation and stability will define the next chapter of corporate finance.