Strong Q3 Results for Major Wall Street Banks Mask Growing Concerns Over Non-Bank Lending and Market Bubble Risks

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Major Wall Street banks including Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo released third-quarter earnings on Tuesday, revealing robust performance in trading and investment banking operations alongside lending growth:

JPMorgan Chase reported record quarterly revenues from its combined equity and fixed income trading operations, while Goldman Sachs and Citigroup achieved their strongest third-quarter performance in several years.

Active IPO markets and recovering M&A advisory fees drove consulting and capital markets revenues at multiple investment banks to their highest levels since late 2021, during the post-pandemic Wall Street boom period. Goldman Sachs saw investment banking revenues surge 43% year-over-year to $2.66 billion, while Citigroup and JPMorgan Chase posted increases of 17% and 16% respectively.

Corporate and household balance sheets remain generally healthy, though demand for conventional business loans and residential mortgages continues to lag. While some issues exist, such as JPMorgan Chase recognizing $170 million in losses related to bankrupt auto lender Tricolor, these risks are primarily concentrated among the most heavily indebted companies and lower-income consumers.

Notably, an increasing number of major banks are pivoting toward financing non-bank lenders and asset management firms. The substantial growth in non-bank financial institution lending has captured the attention of analysts and investors:

These institutions are currently focused more on frequent asset trading within markets rather than providing new financing to the real economy. While most major banks don't separately disclose lending revenues to hedge funds or asset managers, Goldman Sachs' results offer some insight—its prime brokerage division revenues increased by approximately one-third year-over-year, setting a quarterly record for the business.

Recently revised Federal Reserve data shows that all lending growth in the U.S. banking sector this year has come from loans to non-bank institutions. These borrowers now represent 13% of total outstanding bank loans.

JPMorgan Chase CEO Jamie Dimon faced repeated questions about the risks of bank lending to non-bank institutions. He noted that this sector encompasses everything from high-risk subprime loans and high-yield private credit to loans secured by investment-grade assets and financing for trillion-dollar fund management companies, with varying risk profiles. Dimon warned:

There exists substantial "regulatory arbitrage" outside the banking system, and poor lending practices will be exposed when economic conditions deteriorate.

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

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

The Fed plans to modify the calculation method for the Supplementary Leverage Ratio (SLR), which will further enhance banks' ability to conduct such lending categories, enabling them to expand equity brokerage and bond financing operations and channel more funds into potentially bubble-prone markets.

Executives also hope the Federal Reserve and other regulators will further relax rules to release additional capital, giving banks room to take on higher risks or distribute more cash to shareholders—who would then need to find new assets for investment. According to Alvarez & Marsal consulting firm's prediction this week, U.S. deregulation could free up nearly $140 billion in equity requirements for banks, equivalent to almost half of JPMorgan Chase's current capital. While this estimate is quite optimistic, it demonstrates the potential scope of regulatory relaxation.

Simultaneously, President Trump's attempts to influence the Federal Reserve have led market expectations to anticipate a full percentage point rate cut by next summer.

Currently, U.S. stock markets are surging, with corporate borrowing costs approaching risk-free rates. Analysts warn that as concerns about an "AI-driven market bubble" intensify, the Federal Reserve must exercise extreme caution to avoid adding unnecessary fuel to financial flames.

Some worry that with U.S. economic growth expected to slow next year and the labor market softening, future Fed rate cuts are more likely to inflate asset prices rather than address uncertainties from trade and tariffs, which are making corporate executives hesitant about new investments.

Analysis suggests that as U.S. regulators review banking rules, they should seek methods to encourage banks to create credit for the real economy rather than generating more financial bubbles. Regulation should never be relaxed for "ideological deregulation," as this would lead to financial system overheating and plant seeds for more severe future crises.

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