Over the last several years, we have been writing publicly to alert you to the five main issues we see on bank balance sheets today, which make them even more dangerous than they were in 2007 before the Great Financial Crisis toppled the banking industry.
The main reason for our public articles has been to alert you to the rotting below the surface on bank balance sheets. Our goal has been to strongly urge readers to conduct appropriate due diligence in order to identify the safes banks for your hard-earned money so you can act before the problems become much more acute. Each day that goes by takes us closer to the edge of an even larger financial cliff.
At saferbankingresearch.com, we went one step further and outlined what we viewed as 15 of the safest banks in the United States, along with outlining some of the safest banks we have found in some of the higher-populated states, a review of trading/investing platforms, as well as outlining some of the best banks we have found in Canada and the Eurozone.
One of those five balance sheet issues we have been highlighting is regarding shadow lenders and the close interlinkages between traditional banks and shadow lenders. This is now starting to make the news.
In one of our previous articles, we cited an IMF report asserting that traditional banks’ significant exposures to shadow lenders are among the most material risks to global financial stability. According to the IMF, global banks’ exposure to shadow lenders is about $4.5 trillion.
While the IMF did not provide figures for US banks alone, the Fed said last year that US banks had extended almost $3 trillion to shadow lenders. Given the industry’s rapid growth, the current portfolio is likely closer to $3.5 trillion, significantly above the banking system’s total equity of roughly $2.5 trillion. In addition, off-balance-sheet exposure is hard to estimate, but based on figures we discussed in previous articles, total exposure could be around $5 trillion.
Recently, the sector has seen several significant setbacks. BlackRock said it had to restrict withdrawals from one of its main debt funds after redemption requests spiked, and Blackstone reported a similar jump in withdrawals from its private credit fund, BCRED, during the first quarter. Blue Owl also used promised future payments instead of immediate cash to meet investor redemption demands, while Glendon Capital Management, a Los Angeles-based fund, alleged that Blue Owl and many competing private credit managers had understated losses in their portfolios and were carrying assets at inflated values.
The Financial Times reported that Blue Owl’s credit fund, OBDC, valued $235MM of junior preferred stock and second-lien debt in Cornerstone OnDemand at roughly 90 cents on the dollar at the end of 2025. However, the company’s most senior debt has recently traded at only 78 cents on the dollar, implying that OBDC may need to mark down its more junior Cornerstone holdings in the quarter ending later this month. Glendon highlighted similar valuation gaps in Blue Owl’s loans tied to several other companies, including KKR-owned cybersecurity firm Barracuda, defence contractor Peraton Corp, which is owned by Veritas Capital, and Conair Holdings, a private equity-backed maker of hair dryers and Cuisinart kitchen appliances.
This past week, JPMorgan tightened its lending to private credit funds and marked down the value of some loans in their portfolios, according to multiple reports, in yet another blow to the beleaguered shadow banking industry.
As noted, we have written extensively about shadow banks, so feel free to read our previous articles. In short, a lack of transparency and poor underwriting standards were always likely to lead to major problems.
One additional interesting development is what is now happening with Jefferies. The investment bank was hit by the collapses of First Brands Group, an auto parts supplier, and Market Financial Solutions, a UK mortgage lender. This week, Jefferies also said that Western Alliance had filed a lawsuit against it for failing to complete a payment of $126.4 million owed to the regional lender for loans tied to First Brands.
There are market rumours that several hedge funds are now using the following strategy: simultaneously shorting Jefferies’ shares and withdrawing money from the investment bank. Interestingly, there are some similarities between this strategy and what happened to Bear Stearns and Lehman Brothers. If you look at the chart of Jefferies’ share price, these rumours may seem quite plausible. In any case, we are now seeing only the early signs of distress in private credit, and they are very likely to intensify further and become, as the IMF said, one of the most material risks to global financial stability.
Bottom line
Believe it or not, there are more major issues on the larger bank balance sheets as compared to smaller banks, which we have covered in past articles. Moreover, consider that there was one major issue which caused the GFC back in 2008, whereas today, we currently have many more large issues on bank balance sheets. These risk factors include major issues in commercial real estate, rising risks in consumer debt (approaching 2007 levels), underwater long-term securities, over-the-counter derivatives, high-risk shadow banking (the lending for which has exploded), and elevated default risk in commercial and industrial (C&I) lending. So, in our opinion, the current banking environment presents even greater risks than what we have seen during the 2008 GFC.
Almost all the banks that we have recommended to our clients are community banks, which do not have any of the issues we have been outlining over the last several years. Of course, we're not saying that all community banks are good. There are a lot of small community banks that are much weaker than larger banks. That’s why it's absolutely imperative to engage in a thorough due diligence to find a safer bank for your hard-earned money. And what we have found is that there are still some very solid and safe community banks with conservative business models.
So, I want to take this opportunity to remind you that we have reviewed many larger banks in our public articles. But I must warn you: The substance of that analysis is not looking too good for the future of the larger banks in the United States, and you can read about them in the prior articles we have written.
Moreover, if you believe that the banking issues have been addressed, I think that New York Community Bank is reminding us that we have likely only seen the tip of the iceberg. We were also able to identify the exact reasons in a public article which caused SVB to fail. And I can assure you that they have not been resolved. It's now only a matter of time before the rest of the market begins to take notice. By then, it will likely be too late for many bank deposit holders.
At the end of the day, we're speaking of protecting your hard-earned money. Therefore, it behooves you to engage in due diligence regarding the banks which currently house your money.
You have a responsibility to yourself and your family to make sure your money resides in only the safest of institutions. And if you're relying on the FDIC, I suggest you read our prior articles, which outline why such reliance will not be as prudent as you may believe in the coming years, with one of the main reasons being the banking industry’s desired move towards bail-ins. (And, if you do not know what a bail-in is, I suggest you read our prior articles.)
It's time for you to do a deep dive on the banks that house your hard-earned money in order to determine whether your bank is truly solid or not. You can feel free to review our due diligence methodology here, as well as all our prior public articles on the financial industry here: https://www.saferbankingresearch.com/articles
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