EU Watchdog Examines Systemic Risks in Private Credit, Adviser Says

The European Union's financial stability watchdog is examining the risks the burgeoning private credit market poses to the region's economy and may recommend direct regulatory oversight of the industry, according to an adviser to the board.

Richard Portes, a member of the European Systemic Risk Board’s (ESRB) advisory committee, told Reuters that a recently launched taskforce is focusing on the role of private credit in the macroeconomic cycle and its potential to spread or amplify financial shocks.

Increased Scrutiny

The ESRB's primary concern is the interconnectedness between the private credit sector and the broader European financial system. "It is those linkages that we as the ESRB and any macro-prudential authority will worry about," Portes said. "We want to know where the interconnections are. And honestly, not much is yet known about that."

Regulators have been challenged by a lack of comprehensive data from the largely unregulated industry, making it difficult to assess potential dangers. The ESRB's probe aims to better understand these hidden linkages.

A Path to Regulation

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Portes stated the ESRB could recommend that authorities like the European Securities and Markets Authority (ESMA) or the European Commission "exercise their legal powers to regulate private credit." While the ESRB can issue official recommendations, financial supervisors are not required to implement them.

The private credit market, valued at $3.1 trillion, expanded rapidly after the 2008 financial crisis as banks tightened lending standards. It has become a key source of debt financing for riskier businesses and private equity buyouts, but has faced concerns over lending quality and a lack of transparency.

A Chorus of Concern

The ESRB is not alone in its focus on the sector. Other major European institutions have recently highlighted the growing risks associated with private credit, including:

• The Bank of England, which said in a financial stability report on Tuesday that systemic risks from the industry were increasing.
• The European Central Bank, which noted in May that while the euro zone did not face a systemic risk, some pockets of the financial system were exposed.
• The European Stability Mechanism, which on Monday called the rapid growth of private credit a "vulnerability for the euro area."