The October 2025 disclosure of massive loan losses by US regional banks Zions and Western Alliance has exposed a potentially systemic vulnerability in the global banking system: the explosive growth of lending to non-depository financial institutions (NDFIs). What began as isolated cases of alleged fraud has evolved into a broader crisis of confidence, with investors questioning whether banks truly understand the risks lurking in their balance sheets. For Singapore, a global financial hub with deep ties to US banking markets and its own thriving non-bank lending sector, the implications demand careful analysis.
The Catalyst: Cantor Group and the Domino Effect
The Immediate Crisis
In late October 2025, two significant revelations sent shockwaves through financial markets:
Zions Bancorporation disclosed a near-total wipeout on $60 million in loans after discovering “apparent misrepresentations” from borrowers. This wasn’t a partial loss or a workout situation—it was an almost complete evaporation of asset value, suggesting either catastrophic fraud or fundamental failures in due diligence.
Western Alliance Bank escalated matters by filing a lawsuit against the same borrower, the Cantor Group, a commercial real estate firm, for alleged fraud. The decision to pursue legal action publicly signaled that this wasn’t a simple credit deterioration but potentially criminal misconduct.
The market reaction was swift and severe. Regional bank stocks experienced a sharp selloff, with investors drawing uncomfortable parallels to the March 2023 banking crisis that claimed Silicon Valley Bank, Signature Bank, and First Republic Bank.
The Pattern of Fraud
What made investors particularly nervous was that Cantor Group represented the third case of alleged NDFI-related fraud in rapid succession:
- Tricolor collapse (September 2025): The subprime auto lender’s failure cost JPMorgan Chase $170 million, revealing vulnerabilities in the auto lending space.
- Second auto-related company failure (September 2025): Another US auto lender collapsed, suggesting systemic issues rather than isolated incidents.
- Cantor Group (October 2025): The commercial real estate fraud affecting multiple regional banks confirmed a pattern.
JPMorgan CEO Jamie Dimon’s warning resonated ominously: “When you see one cockroach, there are probably more. Everyone should be forewarned on this one.”
Understanding NDFIs: The Shadow Banking Time Bomb
What Are NDFIs?
Non-depository financial institutions are financial companies that provide lending and other financial services but don’t accept deposits from the public. They include:
- Mortgage originators that don’t hold deposits
- Subprime auto lenders like Tricolor
- Payday lenders and alternative credit providers
- Equipment financing companies
- Commercial real estate bridge lenders
- Fintech lending platforms
- Private credit funds
The Post-2008 Regulatory Shift
The explosive growth of NDFIs stems directly from regulatory changes following the 2008 financial crisis. The Dodd-Frank Act, Basel III requirements, and other regulations made it more expensive and complex for traditional banks to engage in certain types of lending:
- Higher capital requirements for risky loans made direct lending less attractive
- Stricter underwriting standards pushed marginal borrowers to alternative lenders
- Enhanced supervision and compliance costs created incentives to move activities off-balance sheet
- Volcker Rule restrictions limited certain trading and investment activities
Regulators essentially pushed risk out of the regulated banking sector. The theory was that if risky lending happened outside the FDIC-insured banking system, taxpayers wouldn’t be on the hook for losses.
The Unintended Consequence
Banks didn’t exit risky lending—they just changed how they participated. Instead of lending directly to subprime borrowers or risky real estate projects, banks began lending to the NDFIs that make those loans. This created a dangerous illusion: banks thought they had transferred risk, but in reality, they had simply added a layer of opacity.
The Scale of NDFI Lending
The numbers are staggering:
- $1.14 trillion: Total commercial loans to NDFIs as of March 2025 (Federal Reserve Bank of St. Louis)
- 26% annual growth since 2012, making it the single fastest-growing loan category
- Unknown concentration: The true extent of NDFI exposure varies widely by institution, with some regional banks having 15-20% of their loan books in NDFI lending
Why NDFI Losses Are Different and More Dangerous
The Velocity and Magnitude Problem
Traditional loan losses typically follow a predictable pattern: early delinquency, then default, then workout or foreclosure, with recovery rates often in the 40-70% range for secured lending. NDFI losses are fundamentally different:
Near-total wipeouts: When NDFI loans go bad, recovery rates can be close to zero. Zions’ $60 million became essentially worthless overnight.
Rapid deterioration: As analyst Catherine Mealor noted, “losses can come very quickly and out of nowhere.” There’s little time to react or manage the exposure down.
Collateral illusion: Banks believed they held $50 million in collateral only to discover they had zero. The collateral—often the loan portfolios of the NDFI itself—can evaporate if the underlying loans were fraudulent or severely misrepresented.
The Information Asymmetry
Banks face a critical knowledge gap with NDFI lending:
- Opacity of underlying assets: When a bank lends to an NDFI, it’s essentially betting on the credit quality of the NDFI’s borrowers—borrowers the bank never directly underwrote or assessed.
- Limited visibility: Banks rely on the NDFI’s representations about their loan portfolios, creating opportunities for fraud or misrepresentation.
- Rapid business model changes: NDFIs can quickly shift their lending strategies, risk appetite, or target markets without the same regulatory oversight that governs banks.
- Complex collateral structures: The collateral for NDFI loans often involves pools of consumer or commercial loans, requiring sophisticated monitoring that many banks may not have implemented adequately.
As Truist analyst Brian Foran observed: “We really don’t know much about these NDFI books. People are saying, ‘I didn’t know it was so easy for a bank to think they had $50 million in collateral and find out they had zero.'”
Comparing to the 2023 Banking Crisis
Similarities That Should Worry Us
Concentration risk: Just as Silicon Valley Bank was overly concentrated in venture capital and technology sector deposits, some regional banks have high concentrations of NDFI loans.
Opacity: The complexity of SVB’s bond portfolio and interest rate risk was hidden until it wasn’t. Similarly, NDFI loan quality is opaque until losses materialize.
Contagion psychology: Once confidence cracks, investors assume the worst about similar institutions, regardless of individual circumstances.
Regulatory blind spots: In 2023, regulators missed the interest rate risk building in regional banks. Today, they may be underestimating NDFI credit risk.
Critical Differences
Liquidity vs. credit: The 2023 crisis was primarily about liquidity and interest rate risk—SVB had assets, but they were underwater and couldn’t be quickly liquidated. The NDFI crisis is about credit quality—the assets themselves may be worthless.
Speed of contagion: Bank runs happen over days or hours. Credit losses take longer to crystallize across the system.
Government response: Deposit insurance and Fed lending facilities can stop runs. There’s no equivalent quick fix for widespread credit deterioration.
Systemic size: The banks that failed in 2023 were large regional institutions. NDFI exposures are more widely distributed across the banking system.
Which Banks Are Most Exposed?
High-Risk Institutions
According to analyst coverage and August 2025 research from Janney Montgomery, banks with the highest proportion of NDFI loans include:
- Western Alliance Bank: Already involved in the Cantor Group lawsuit
- Axos Financial: Known for specialty lending relationships
- Various regional banks in the $10-50 billion asset range that pursued growth through wholesale lending channels
The Screening Challenge
Investors face a difficult task identifying at-risk institutions:
- Disclosure limitations: Banks aren’t required to break out NDFI lending in granular detail
- Definition inconsistencies: What one bank calls NDFI lending, another might categorize differently
- Collateral quality variance: Two banks with similar NDFI exposure may have vastly different risk profiles depending on underwriting standards
Economic Context: Why Now?
The Perfect Storm
Several factors have converged to expose weaknesses in NDFI lending:
Interest rate environment: After rapid Fed rate increases in 2022-2023, many NDFIs face funding cost pressures. Those that locked in low-cost funding are seeing it mature, while their loan portfolios are stuck at lower yields.
Commercial real estate stress: Office real estate, in particular, faces structural challenges from remote work, creating pressure on CRE-focused NDFIs like Cantor Group.
Auto market deterioration: Subprime auto lending thrived in the low-rate environment but is now seeing elevated defaults as consumers face inflation and higher debt service costs.
Credit cycle maturation: We’re several years into the post-pandemic credit cycle, and the weakest credits are now breaking.
Zombie companies: Ultra-low rates from 2020-2021 allowed weak businesses to survive. As those financing lifelines dry up, failures accelerate.
As Dimon’s metaphor suggests, “the tide went out,” exposing those without proper risk management—”lacking their swim trunks.”
Singapore’s Exposure and Implications
Singapore’s Banking Sector Vulnerabilities
Singapore, as a global financial hub, faces multiple vectors of NDFI-related risk:
1. Direct US Market Exposure
DBS Group, OCBC, and UOB all have US operations and wholesale banking relationships. While their US footprints are smaller than domestic operations, they do participate in syndicated lending and maintain correspondent relationships with US regional banks.
Wealth management exposures: Singapore’s private banking sector holds significant positions in US bank stocks and bonds. Regional bank turmoil directly impacts wealth management portfolios.
Institutional investments: GIC, Temasek, and Singapore pension funds have investments in US financial institutions, including regional banks.
2. Asia-Pacific NDFI Growth
Singapore has its own thriving non-bank lending sector:
Fintech lenders: Companies like Funding Societies, Validus, and numerous digital lending platforms operate in Singapore and across Southeast Asia, often with funding from traditional banks.
Trade finance intermediaries: Non-bank trade finance providers are a significant part of Singapore’s role as a regional financial hub.
Private credit: Singapore has become a key hub for Asia-focused private credit funds, which often borrow from banks using credit facilities.
Property developers and REITs: While regulated differently than US NDFIs, Singapore’s extensive property development sector relies on bank financing in ways that create similar information asymmetries.
3. Regulatory Parallels
The Monetary Authority of Singapore (MAS) has implemented rigorous post-2008 banking standards similar to global norms. This has:
- Pushed some riskier lending to non-bank channels
- Created incentives for banks to fund non-bank lenders rather than lend directly
- Resulted in less visibility into true credit risk in the system
Specific Singapore Risk Factors
Southeast Asian NDFI exposure: Singapore banks are major lenders to non-bank financial companies across Southeast Asia, particularly in:
- Indonesia’s consumer finance sector
- Malaysia’s Islamic financing institutions
- Thailand’s auto and motorcycle lending companies
- Vietnam’s rapidly growing fintech sector
Chinese developer relationships: Singapore banks have relationships with Chinese property developers, some of which operate through non-bank subsidiaries or special purpose vehicles—arrangements that share characteristics with NDFI lending.
Crypto and digital asset lenders: Singapore’s position as a crypto-friendly jurisdiction means local banks have relationships with digital asset lenders and platforms, another area where collateral valuations can be problematic.
MAS Response and Preparedness
Singapore’s regulatory framework provides some protection:
Strong supervision: MAS maintains rigorous oversight of banks’ risk management practices, likely including NDFI-type exposures.
Conservative underwriting culture: Singapore banks have historically maintained strong credit standards, though growth pressures exist.
Capital buffers: Singapore banks maintain capital ratios above global minimums, providing cushion for unexpected losses.
Early warning systems: MAS requires detailed risk reporting and conducts regular stress tests.
However, gaps remain:
Cross-border opacity: MAS’s visibility into overseas NDFI relationships may be limited, particularly for non-bank lenders operating outside Singapore.
Fintech blind spots: Rapid innovation in digital lending may outpace regulatory frameworks.
Contagion channels: Even if Singapore banks have limited direct NDFI exposure, global market turmoil could impact funding costs, share prices, and confidence.
Market Reaction and Investor Sentiment
The “Overreaction” Debate
KBW analyst Catherine Mealor characterized the October 2025 regional bank selloff as an “overreaction,” noting:
- Regional banks benefit from an improving interest rate environment
- Rising M&A activity supports valuations
- Many high-quality regional banks are trading at massive discounts
- The KRX (KBW Regional Bank Index) has been oversold
The Bear Case
However, skeptics argue the market reaction may be rational, or even insufficient:
Pattern recognition: Three fraud cases in rapid succession suggest systematic underwriting failures, not isolated incidents.
Unknown unknowns: If banks don’t know what’s in their NDFI portfolios, how can investors price the risk?
Incentive misalignment: NDFIs have incentives to misrepresent collateral quality, and banks may not have adequate verification mechanisms.
Economic headwinds: With a potential economic slowdown, NDFI credit quality could deteriorate further.
Flight to Quality
Investors are clearly differentiating:
- Money center banks like JPMorgan, despite taking losses, are seen as more transparent and better capitalized
- High-NDFI exposure regionals are being sold aggressively
- Conservative regionals with minimal NDFI lending are trading at premiums
What Happens Next: Scenarios and Outcomes
Best Case Scenario: Contained Event
Outcome: The Cantor Group, Tricolor, and related cases represent isolated frauds, not systemic risk.
Requirements:
- No additional major NDFI failures
- Banks demonstrate they’ve conducted thorough reviews of NDFI portfolios
- Regulators provide clear guidance and oversight frameworks
- Economic conditions remain supportive
Probability: Moderate (35-40%)
Singapore impact: Minimal direct impact; brief market volatility but no lasting damage.
Moderate Case: Rolling Disclosure
Outcome: Additional NDFI losses emerge over 6-12 months but remain manageable.
Characteristics:
- More regional banks disclose NDFI-related losses in the $50-200 million range
- No single institution faces existential threat
- Earnings are impaired but banks remain solvent
- Regulatory scrutiny intensifies
- NDFI lending growth slows dramatically
Probability: High (45-50%)
Singapore impact:
- Moderate market volatility
- Singapore banks face questions about Southeast Asian NDFI exposures
- MAS likely issues guidance on non-bank lending relationships
- Private banking clients experience wealth erosion
- Fintech funding becomes more expensive and difficult
Worst Case: Systemic Crisis
Outcome: NDFI losses prove widespread and severe, threatening financial stability.
Characteristics:
- Multiple large regional banks face capital impairment
- Confidence crisis leads to deposit outflows
- Credit crunch as banks pull back from all wholesale lending
- Economic recession as credit becomes scarce
- Potential bank failures or forced mergers
Probability: Lower but non-trivial (15-20%)
Singapore impact:
- Significant market turmoil and potential recession
- Singapore banks face funding pressures and need to raise capital
- Flight to quality benefits Singapore as safe haven but domestic lending slows
- MAS intervenes with liquidity support measures
- Regional economic growth slows as credit tightens across Southeast Asia
Regulatory and Policy Responses
What US Regulators Should Do
Enhanced NDFI oversight: Create reporting requirements that give regulators and investors visibility into NDFI exposures.
Stress testing: Include NDFI credit losses in bank stress test scenarios.
Collateral verification: Require independent verification of NDFI loan portfolio collateral, not just reliance on borrower representations.
Capital charges: Consider whether NDFI lending deserves higher risk weights given concentration and opacity risks.
Non-bank supervision: Expand oversight of large NDFIs that pose systemic risk, even if they don’t accept deposits.
MAS Considerations for Singapore
Regional coordination: Work with Southeast Asian regulators to ensure visibility into cross-border non-bank lending.
Disclosure enhancement: Require Singapore banks to break out lending to non-bank financial institutions with sufficient granularity.
Scenario analysis: Conduct specific stress tests around non-bank financial institution failures and their impact on bank portfolios.
Fintech framework: Ensure regulatory framework keeps pace with innovation while maintaining systemic stability.
Early intervention: Don’t wait for losses to materialize—proactively assess and address concentrations now.
Investment and Risk Management Implications
For Bank Investors
Due diligence questions:
- What percentage of the loan book is to NDFIs?
- What types of NDFIs (consumer finance, CRE, auto, etc.)?
- What independent verification of collateral exists?
- What monitoring and early warning systems are in place?
- What has been the historical loss experience in NDFI lending?
Portfolio construction:
- Avoid high-NDFI-exposure banks unless compensated with significant valuation discounts
- Favor larger, diversified banks with transparent risk management
- Consider that seemingly cheap valuations may reflect genuine risk, not opportunity
For Singapore Banks and Businesses
For banks:
- Conduct comprehensive reviews of non-bank lending relationships
- Enhance due diligence and ongoing monitoring
- Consider reducing concentrations even if it means lower growth
- Improve disclosure to get ahead of investor concerns
For businesses:
- Diversify funding sources to reduce dependence on any single type of lender
- Understand your lenders’ capital and funding situations
- Prepare for potential credit tightening
For fintech and non-bank lenders:
- Expect increased scrutiny from bank partners
- Build more robust reporting and transparency capabilities
- Prepare for higher funding costs
- Consider that growth may slow as bank appetite diminishes
Conclusions and Key Takeaways
The Core Problem
The NDFI lending crisis reveals a fundamental flaw in post-2008 financial regulation: pushing risk out of regulated banks didn’t eliminate it—it just made it harder to see and manage. Banks thought they were being prudent by lending to NDFIs rather than making risky loans directly, but they were actually taking on complex, opaque credit risk with limited ability to underwrite or monitor effectively.
The Cantor Group Wake-Up Call
The losses at Zions and Western Alliance, following the Tricolor collapse, have pulled back the curtain on a much larger issue. Jamie Dimon’s “cockroach” warning is apt: what we’ve seen so far is likely just the beginning of a broader reassessment of NDFI credit quality.
Singapore’s Position
Singapore faces moderate risk from the NDFI crisis:
Strengths: Strong regulation, conservative banking culture, robust capital buffers, and excellent risk management frameworks provide protection.
Vulnerabilities: Exposure through US market investments, growing non-bank lending in Southeast Asia, and potential blind spots in fintech and cross-border relationships create vulnerabilities.
Required action: Proactive assessment and enhanced oversight now, before losses materialize, rather than reactive crisis management later.
The Broader Message
This crisis underscores several enduring truths about financial risk:
- Complexity is the enemy of transparency: Adding layers (bank → NDFI → ultimate borrower) doesn’t reduce risk, it obscures it.
- Regulatory arbitrage has costs: Moving activities outside regulation to avoid capital charges works until it doesn’t.
- Fast growth often masks problems: The 26% annual growth in NDFI lending should have been a warning sign, not a success story.
- Fraud flourishes in opacity: The alleged fraud at Cantor Group and others succeeded precisely because banks couldn’t easily verify what they were being told.
- Contagion is psychological: Even banks with minimal NDFI exposure suffered in the selloff because investors assume guilt until proven innocent.
Looking Ahead
The coming months will be critical. If additional NDFI failures emerge, we could face a genuine crisis. If losses remain contained, this episode will become a cautionary tale and catalyst for reform.
For Singapore, the imperative is clear: learn from the US experience, assess domestic vulnerabilities proactively, and ensure that the city-state’s reputation for financial stability and prudent risk management remains intact. In an increasingly complex global financial system, that reputation is perhaps Singapore’s most valuable asset.
The NDFI crisis reminds us that in finance, as in physics, you can’t destroy risk—you can only transform it. And transformed risk, hidden in the shadows of the banking system, may be the most dangerous kind of all.