A growing reliance on a small group of global banks to provide financing to hedge funds and proprietary trading firms is raising fresh questions about financial stability, according to a a report by Bloomberg citing new analysis from S&P Global.
The ratings agency highlighted that a handful of investment banks—BNP Paribas, Barclays, Goldman Sachs and Morgan Stanley—have seen combined revenues linked to market financing increase sharply, rising around 25% between 2024 and 2025 to more than $24bn. S&P estimates this now accounts for roughly 30% of their overall markets-related income, underscoring how central this business has become.
The report also points to the rapid expansion of bank lending to hedge funds through prime brokerage and related services. Outstanding financing in this segment exceeded $2.5tn in 2024, effectively doubling over the past four years, as hedge fund leverage has continued to climb alongside record industry assets, which S&P estimates at around $5tn.
According to the agency, the combination of rising leverage and a narrow set of lenders creates structural vulnerabilities. A small group of globally active banks is increasingly exposed to the trading activity of non-bank financial firms, which have become more influential in key markets including government bonds.
S&P cautioned that this concentration could amplify stress in periods of market disruption, particularly if multiple funds are forced to unwind positions simultaneously or if funding conditions tighten abruptly.
The report also draws parallels with previous episodes of instability in the sector, including the 2021 collapse of Archegos Capital Management, which triggered multi-billion-dollar losses for several banks and intensified regulatory scrutiny of prime brokerage risk practices.
While the agency noted that such extreme events remain relatively rare, it said the scale and interconnectedness of current exposures warrant continued attention from regulators and risk managers.
Another area of concern highlighted in the report is the growing popularity of leveraged relative-value strategies, particularly the so-called “basis trade,” where hedge funds exploit small pricing differences between government bonds and futures contracts. S&P warned that these trades can become increasingly fragile when funded with high leverage and tight margin requirements.
The report also flagged competition among banks as a potential risk factor, suggesting that pressure to win business could lead to looser financing terms or reduced “haircuts,” further increasing system-wide leverage.
Regulators including the Financial Stability Board and the Bank of England have already been examining the expanding linkages between banks and non-bank financial institutions, particularly as hedge funds and proprietary trading firms play a larger role in sovereign bond markets.
S&P concluded that while major banks remain broadly well-capitalised and generally effective at managing liquidity and credit risk, the growing dependence on a concentrated set of counterparties represents a structural feature of the current market that could become more problematic under stress conditions.
