Behind the highlights of the major Wall Street banks' third-quarter reports: Non-bank lending surges, fueling bubbles and sowing market concerns

On Tuesday, the financial reports released by major Wall Street banks including Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo showed that trading and investment banking performed strongly in the third quarter, with loan business also seeing growth:

• JPMorgan Chase reported record quarterly revenues from its combined equities and fixed income trading businesses; Goldman Sachs and Citigroup also achieved their best third-quarter performance in years.
• The active issuance of new stocks and a rebound in merger advisory fees drove the consulting and capital markets revenues of several investment banks reporting earnings to their highest levels since the end of 2021, during the post-COVID-19 frenzy on Wall Street. Goldman Sachs' investment banking revenue grew 43% year-on-year to $2.66 billion; Citigroup and JPMorgan Chase increased by 17% and 16%, respectively.
• Overall, corporate and household balance sheets remain robust, although demand for commercial loans and housing mortgages remains weak. While there are some issues, such as JPMorgan Chase confirming a $170 million financing loss related to the bankrupt auto loan company Tricolor, these risks are mainly concentrated among heavily indebted corporations and low-income consumers.

It is noteworthy that an increasing number of large banks are turning to provide financing to non-bank lending institutions and asset management companies. The recent significant growth in loans to non-bank financial institutions has drawn the attention of analysts and investors:

These institutions are currently more focused on frequently buying and selling assets in the market rather than providing new financing activities for the real economy. Although most large banks do not separately disclose loan income from hedge funds or asset management companies, Goldman Sachs' performance provides some clues—its prime brokerage revenue grew by about one-third year-on-year, setting a record for that business in a single quarter.

Recent revisions by the Federal Reserve indicate that this year, all loan growth in the U.S. banking industry has come from lending to non-bank institutions. These borrowers now account for 13% of the total outstanding loans of banks.

JPMorgan Chase CEO Jamie Dimon has been repeatedly asked about the risks of banks lending to non-bank institutions. He pointed out that this area encompasses a range of risks, from high-risk subprime loans and high-yield private credit to loans secured by investment-grade assets and financing activities aimed at trillion-dollar fund management companies. Dimon warned:

There is a significant amount of "regulatory arbitrage" outside the banking system, and when the economy slows down, bad lending will be exposed.

We have been in a relatively loose credit environment for too long, and I believe that once a downturn occurs, the credit quality outside the banking system may deteriorate more than people expect.

Meanwhile, the Federal Reserve is also preparing to cut interest rates in the coming months and may reduce capital requirements for banks:

The Federal Reserve plans to modify the calculation of the Supplementary Leverage Ratio (SLR), which will further enhance banks' ability to engage in the aforementioned types of loans, allowing them to expand their equity brokerage and bond financing businesses, channeling more funds into potentially bubble-like markets Executives also hope that the Federal Reserve and other regulatory agencies will further relax rules to free up more capital, allowing banks to take on higher risks or distribute more cash to shareholders—who will then need to seek new assets to invest in. According to a forecast by Alvarez & Marsal consulting firm this week, the relaxation of regulations in the U.S. could allow banks to release nearly $140 billion in capital requirements, equivalent to nearly half of JPMorgan Chase's current capital. While this estimate is quite optimistic, it is sufficient to show the potential extent of regulatory relaxation.

Meanwhile, President Trump’s attempts to influence the Federal Reserve have led the market to expect that interest rates may be lowered by a full percentage point before next summer.

Currently, the U.S. stock market is soaring, with corporate borrowing costs approaching risk-free rates. Some analysts warn that as concerns about an "AI-driven market bubble" continue to rise, the Federal Reserve must be particularly cautious to avoid adding unnecessary fuel to the financial flames.

Some are worried that U.S. economic growth will slow next year, and the labor market is softening. Future rate cuts by the Federal Reserve are more likely to push up asset prices rather than resolve the uncertainties brought about by trade and tariffs, which are causing corporate executives to hesitate on new investments.

Media analysis suggests that U.S. regulators, while re-evaluating banking rules, should seek ways to encourage banks to create credit for the real economy rather than generate more financial bubbles. Regulatory relaxation should never be pursued for "ideological reasons," as it would lead to overheating of the financial system and lay the groundwork for more severe crises in the future