The conflict in the Middle East has triggered a renewed surge in gasoline prices, adding pressure to U.S. consumers already facing the highest credit delinquency rates since the Global Financial Crisis. Combined with a steady rise in consumer credit stress, these developments have heightened concerns that systemic financial vulnerabilities may be emerging, particularly in securitized credit markets. Investor worries have been further heightened by recent high-profile bankruptcies, including U.K. lender MFS in February, and First Brands and Tricolor in 2025.
While the deterioration in consumer credit performance warrants close scrutiny, the primary question is whether these pressures are likely to spill over into the broader financial system.
Consumer credit delinquencies have steadily increased since 2021, with the sharpest deterioration concentrated in auto loans and credit cards. This reflects a combination of the depletion of post-pandemic fiscal stimulus, looser lending standards early in the post- pandemic recovery, and persistent inflation that has strained affordability, particularly for lower-income, younger, and lower-credit-score borrowers. Exacerbating these trends is the more than 40% increase in the national average gasoline price since the start of 2026, which is likely to further weigh on spending and strain household finances.
While the deterioration in consumer credit performance has raised concerns about the overall health of household balance sheets, aggregate measures of consumer leverage and liquidity have so far remained resilient. Helping to explain this divergence is the fact that the rise in delinquencies has not been uniform across borrowers.
A subset of consumers, primarily subprime borrowers who tend to be lower-income households, has driven most of the increase in delinquencies. These households are also disproportionately exposed to the current energy shock, which could further exacerbate existing pressures. By contrast, prime borrowers, typically higher-income households, have experienced only a marginal deterioration in credit performance. As long as labor market conditions remain supportive and layoffs stay contained, this divergence is likely to persist, limiting the risk of a more generalized deterioration in household credit performance.
Securitization remains the primary funding channel for consumer credit, transferring credit risk from loan originators to institutional investors such as banks, insurers, and asset managers. Elevated subprime delinquencies are therefore likely to continue pressuring select segments of the structured credit market.
However, conditions today differ meaningfully from those in the pre-GFC period. Structural and underwriting improvements, particularly in subprime asset-backed securities, have materially enhanced investor protection. Today, investors can expect:
- Higher subordination levels: Loans to subprime borrowers feature a much larger cushion of junior (or subordinated) debt in the lower portion of the capital structure. This serves as the first-loss position in the event of a default in any of the underlying pool of loans that make up most securitized debt. This credit enhancement ensures that losses to more senior debt holders, typically commercial banks and insurance companies, are minimized.
- Larger spread cushion: The difference in spread between subprime and prime loans is much wider today compared to pre-GFC, signaling increased risk premiums lenders associated with lower-quality borrowers. This reflects a much more conservative approach in the underwriting process to potential losses.
- Cash-flow triggers: It’s much more common for lenders to require contingencies that redirect and prioritize cash flows from the underlying loans to more senior debt holders in times of stress. This helps provide additional downside protection and minimizes loss if default risks rise.
- Tighter underwriting standards: Compared to the run-up to the GFC, the fundamental lending environment today sees lenders put much more emphasis on income and employment verification. This is a far cry from the pre-GFC era, which was characterized by a proliferation of “no income, no job, no asset” (NINJA) loans.
Today, subprime loans represent a relatively small share of the overall consumer credit market, estimated at roughly 14%. In the auto loan market specifically, which accounts for the largest portion of consumer credit, subprime issuance has also remained modest by historical standards, averaging around $40 billion annually in recent years. This stands in sharp contrast to the roughly $450 billion of subprime mortgage issuance seen annually in the years leading up to the GFC.
Taken together, these structural and underwriting differences, combined with the smaller scale of today’s subprime market, should help limit the potential for negative contagion stemming from the recent rise in consumer credit delinquencies.
Even in a more adverse scenario, the transmission of consumer credit stress to the banking system appears constrained. Banks’ direct exposure to consumer credit has declined over time as securitization has shifted risk toward non-bank institutions such as insurance companies and asset managers. Moreover, aggregate leverage within the banking system is substantially lower than in 2008, capital buffers (measured as their Tier-1 risk-based capital ratio), are wider, and loan-loss reserves remain elevated relative to historical levels.
Concerns stemming from recent bankruptcies and potential fraud deserve attention, but available evidence continues to point to idiosyncratic, not systemic, risk. Consider that a recent comprehensive review of the loan book of one of the largest banks in the subprime auto market found that, across its entire asset-backed finance portfolio, only 2 of 120,000 vehicles were invalid. So, while smaller lenders with higher subprime exposure may face localized challenges, larger banks’ limited exposure should help to contain broader financial stability risks.
The latest rise in gasoline prices amid the Middle East conflict represents another headwind for U.S. consumers and is likely to keep already high delinquency rates elevated. Yet, since credit stress is mostly concentrated, structural protections via stronger underwriting exist, and banks are both better capitalized and less exposed than in prior cycles, we believe that direct comparisons to previous credit cycles, such as 2008, are overblown.
Ultimately, while the latest gasoline price shock could push delinquencies higher, potentially adding pockets of headwinds to the structured credit market, risks to overall financial stability should remain manageable for investors.
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Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Fixed‐income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Securitized debt presents investors with several risks, including credit, interest rate, prepayment, and liquidity risks. Its reliance on the performance of underlying assets, such as mortgages and auto loans, makes it vulnerable to market volatility and economic downturn. Asset-backed securities are affected by the quality of the credit extended in the underlying loans. Defaults or losses on the loans will negatively impact the value of the asset-backed securities.
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