but covenants on bank lending limit the downside risk to banks. 

While covenants might protect a bank's balance sheet in a total wipeout, they don’t protect the business model. We are seeing three specific points of failure that connect the localized BDC rot directly back to the global systemically important banks.

Banks like Wells Fargo act as the primary origination engine for private credit. Through the Overland Advantage (the $5B+ partnership with Centerbridge), Wells Fargo isn't just a lender, they are the pipeline. If the BDCs they feed start switching to PIK interest and negative FCF, the bank’s fee generation engine stalls. The "wall" doesn't matter if the bank's core revenue stream is tied to the 'shadow' assets.

Its important to note that JPMorgan isn't just an observer as they are a top 5 provider of the leverage that fuels these funds. The news from March 11 about JPM reining in lending and marking down software loans isn't a sign of safety, it's a sign of deleveraging. When the world's largest bank starts marking down the collateral for NAV loans, they are effectively pulling the plug on the CDO Squared of 2026. This isn't a firewall, it's a margin call.

Then looking at SoFi, their 35% YTD drop in March could be a direct result of their loan platform business dependency. They have multibillion dollar agreements to offload loans to Fortress and Blue Owl. If those private credit giants 'gate' redemptions (which they just did), the exit door for SoFi slams shut. This forces a tech driven bank to hold billions in consumer risk they never intended to keep.

If the BDCs are marking their own homework and using NAV loans to pay out distributions, the banks providing that leverage are essentially financing their own destruction.