Auto-lender wreckage taints Wall Street mechanics

Fifth Third Bancorp

12/09/2025 19:08

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, Sept 12 (Reuters Breakingviews) - An auto-lending crash helps make the case for a U.S. financial regulation tune-up. Tricolor, which targeted riskier U.S. borrowers, filed for bankruptcy this week, leaving more than 25,000 creditors to nurse anywhere from $1 billion to $10 billion in total losses. Fraud may be a factor, but the wreckage also illuminates flaws with some Wall Street mechanics.

The Dodd-Frank Act passed in 2010 aimed to prevent another systemic crisis by forcing banks to hold more capital and discouraging them from making imprudent loans. To do so, lawmakers tinkered with the so-called risk weightings that broadly assess the asset fragility. Less dangerous ones, like cash, are assigned a zero rating that requires less capital to be held against them, while credit extended to companies is often appraised at 100% or more. Loans to nonbank lenders, because of the magic of bundling and selling such portfolios, can be weighted as low as 20%, thus making financial middlemen like Tricolor more attractive as customers.

Bank lending to non-depository institutions, including financial technology ventures and private credit funds, has tripled to $1.2 trillion from less than $400 billion a decade ago. Dallas-based Tricolor, which provided high-interest loans to vehicle buyers with little or no credit history, many of them Hispanic, benefited from this system.

A slowing economy and government crackdowns on immigration, however, pushed delinquencies among largely undocumented borrowers up to 11.3% in August from 8.5% a year earlier, according to Moody’s Analytics. Fifth Third Bank FITB.O said it had uncovered “alleged external fraudulent activity” at a commercial borrower in the asset-backed finance market and would take a non-cash impairment charge on most, if not all, of its remaining $200 million exposure. It did not name the institution involved, but Bloomberg reported that it was Tricolor. JPMorgan JPM.N, Barclays BARC.L and others have not yet disclosed any related losses.

Two years ago, authorities proposed the Basel 3 Endgame to finalize international capital rules set in motion after the global financial crisis. It would have raised the minimum risk weighting for loans to customers like Tricolor to 45% and reduced them to 85% for direct subprime lending to individuals. But regulated U.S. banks, which hold about $14 in reserves for every $100 of loans now compared to $8 pre-crisis, strenuously pushed back against the broader plan. Despite the bigger cushions, they are increasingly exposed to alternative lenders, including private credit funds, which suggests the Tricolor damage may yet turn into a pileup.

Follow Stephen Gandel on LinkedIn and X.

CONTEXT NEWS

Tricolor, a U.S. subprime auto lender and dealer, filed for Chapter 7 bankruptcy on September 10 with as much as $10 billion of liabilities to at least 25,000 creditors including JPMorgan, Barclays and Fifth Third Bank. Its estimated assets are also between $1 billion and $10 billion.

Fifth Third said on September 9 that it was taking a $200 million write-down related to an unnamed commercial borrower in the asset-based securities market with losses likely caused by fraud.

Dallas-based Tricolor is under investigation by the U.S. Department of Justice, the Financial Times reported on September 10, citing unnamed sources.

Banks are quickly growing loans to less regulated peers https://www.reuters.com/graphics/BRV-BRV/BRV-BRV/bypredqjrve/chart.png

(Editing by Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))