WTF Friday (aka Jargon Alert): NBFIs

By Patrick Diamond, CFP®

Nonbank financial institutions (NBFIs) are financial entities that provide many of the same services as traditional banks—such as lending, investing, risk pooling, and payment facilitation—but do not hold a banking license and typically cannot accept traditional deposits. Examples include insurance companies, investment funds, hedge funds, private equity firms, mortgage lenders, leasing companies, and fintech platforms. NBFIs play a crucial role in channeling credit and capital through the financial system, often serving sectors or clients that fall outside the scope of conventional banking. However, because they operate outside the standard banking regulatory framework, their activities can also introduce unique risks related to liquidity, leverage, and systemic stability.

Nonbank financial institutions play a central and expanding role in the private credit market, which involves lending directly to businesses outside of traditional bank channels and public debt markets. These institutions—such as private credit funds, business development companies (BDCs), and alternative asset managers—provide customized financing solutions to middle-market and private companies that may lack access to traditional bank loans or bond issuance.