Fed Flags Hidden Credit Risks in AI and Subprime Loans—But Says No Crisis… Yet

The Federal Reserve's November 2025 Financial Stability Report paints a cautiously steady picture of the U.S. financial system—one that remains resilient but is beginning to show familiar stress points beneath the surface. For traders and credit watchers, the takeaway is nuanced: while there are no flashing red lights signaling an imminent crisis, the tone of the report underscores that risks are building in specific corners of the market, particularly in consumer credit, commercial real estate, and emerging areas like AI-linked financing.

The Fed’s assessment matters for more than just macro commentary—it shapes how policymakers weigh the balance between holding interest rates steady and easing financial conditions heading into 2026. With the economy still navigating elevated borrowing costs and a lingering government shutdown that’s disrupted key data releases, the central bank’s internal read on credit health has taken on added importance. This report suggests the Fed sees the system as fundamentally sound, but with a rising trend of vulnerabilities that bear close watching.

One of the clearest signals comes from the Fed’s discussion of credit quality. While household and business leverage ratios remain near 20-year lows, the composition of debt is shifting in ways that could magnify strain if the labor market cools. Subprime auto loans, for example, have stabilized above pre-pandemic delinquency levels. The Fed notes that longer-term structures for riskier borrowers—often stretching to six or seven years—are amplifying exposure to used-vehicle depreciation and income shocks. Similarly, credit card delinquencies have risen meaningfully for lower-credit-quality borrowers, a trend that tracks with high inflation-adjusted spending and a gradual drawdown of pandemic-era savings.

In commercial real estate, the report offers a tempered update. After steep valuation declines in 2023 and 2024, prices have stabilized, but refinancing risk remains front and center. The Fed estimates that a large volume of CRE debt will mature within the next 12 months, much of it tied to older, lower-rate loans that will be repriced in a higher-rate environment. While banks have increased reserves and the sector is not seen as systemically threatening, the Fed cautions that small and regional lenders with heavy office exposure could see further balance sheet pressure if market liquidity tightens again. (Related Tickers: PLD, SPG, O, KRC, AKR, PECO, VNO, FR. STAG, BRX).

Leverage within the non-bank financial sector is another theme. Hedge fund leverage is at the upper end of its historical range, particularly in Treasury and derivative exposures. Life insurers have also taken on greater balance-sheet leverage, though capital ratios remain strong. By contrast, bank capital levels are described as “robust,” and stress testing suggests broad capacity to absorb shocks. This divergence reinforces one of the Fed’s key messages: the center of gravity for financial risk has shifted outside the traditional banking system.

Perhaps the most forward-looking section of the report—and the one most likely to grab investors’ attention—is the special topic on artificial intelligence and vendor financing, found on pages 46–48. The Fed flags a growing trend of AI hardware and data-center companies using vendor-financing arrangements to fund massive capital expansion. These structures, often between chipmakers, cloud service providers, and downstream AI startups, blur the line between customer receivables and credit exposure. The Fed compares the phenomenon to the supplier-credit networks seen during the late-1990s tech buildout, warning that “nontransparent financing interconnections” could transmit stress quickly if AI demand softens or valuations correct.

Importantly, the report doesn’t frame this as a systemic threat—but it does signal that regulators are paying attention. The language suggests concern about hidden leverage building through indirect credit channels tied to AI infrastructure and data-center expansion, a space that has already seen record vendor-financed deals this year. For investors tracking the broader “AI trade,” this section is a reminder that rapid capital cycles tend to create financial feedback loops—particularly when optimism meets aggressive financing structures.

On the valuation front, the Fed reiterates that equity prices remain elevated by historical standards. The forward P/E ratio for the S&P 500 sits near the top of its 20-year range, and the equity-risk premium—the compensation investors demand over Treasuries—is near cycle lows. In other words, investors are being paid very little to take equity risk at a time when earnings growth is slowing and real rates remain high. The Fed stops short of calling valuations excessive, but the implication is that risk-taking appetite may be running ahead of fundamentals, especially in growth and AI-linked segments.

For markets, the broader message is one of vigilant calm. The Fed’s report does not hint at any immediate tightening in credit conditions that would push policymakers toward emergency action, nor does it suggest a credit freeze is on the horizon. However, it does lay out a map of rising fault lines—subprime credit fatigue, CRE refinancing cliffs, and speculative behavior in emerging tech financing—that could compound if growth weakens or rates remain higher for longer.

In short, this isn’t a crisis warning—but it is a reminder that cracks in credit tend to widen gradually before they matter suddenly. For now, the Fed’s posture remains steady, confident that system resilience is intact. But the trendline is bending in the wrong direction, and both policymakers and investors will be watching closely to see whether today’s isolated stress points turn into tomorrow’s tightening cycle catalyst.