(Bloomberg) -- Europe’s banks don’t fully grasp how much they could get hit by turmoil in the burgeoning market for private credit, creating the need for more stringent disclosure rules, a top European Central Bank official said.
“We have recently completed a deep dive on the topic and found that banks are not able to properly identify the detailed nature and levels of their full exposure to private credit funds,” ECB Supervisory Board member Elizabeth McCaul said in a speech on Tuesday, confirming a Bloomberg report from last month. “We should further harmonize, enhance and expand reporting requirements.”
Private credit — which generally refers to loans from non-banks — has been surging over the past few years as the asset class offers investors attractive returns. For borrowers, it’s an alternative source of funding that does away with many of the sometimes burdensome regulatory requirements applying to bank credit.
The market for private credit could grow “by double digits annually” to hit $3 trillion eventually, Bloomberg Intelligence analyst Paul Gulberg said Tuesday, based on a BI survey. The respondents expected most of the expansion to take place in North America, followed by Europe, he said.
The asset class’s success has also made it a source of concern for regulators. They worry that private credit may create a false impression that risk has been shifted out of the banking system to other parts of the financial world — and hence largely out of the purview of regulators — when in fact it hasn’t.
Hits to banks from turmoil at so-called non-bank financial institutions “can materialize through various channels” such as “correlation of exposures,” McCaul said on Tuesday. “The end investors are pension funds, sovereign wealth funds and insurance firms, but banks play a significant role in leveraging and providing bridge loans at various levels to credit funds.”
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