The ESRB review and broader EU supervisory push reflect growing concern that opaque valuations, leverage and complex structures in the roughly $1.5 trillion-$2 trillion market could mask risks despite limited direct exposures.
The European Systemic Risk Board is reviewing vulnerabilities in private credit as European regulators intensify scrutiny of a global market the Financial Stability Board estimates at $1.5 trillion to $2 trillion. At the same time, European supervisors are seeking more detailed information from U.S. authorities on banks’ underlying exposures to private-credit assets, but officials say they have met resistance over confidentiality and reporting burdens. Recent assessments by the European Central Bank and the FSB have stopped short of calling the sector an immediate systemic threat, but they have highlighted valuation uncertainty, sector concentration, leverage, data gaps and spillover risks during broader market stress. ECB analysis put euro-area banks’ direct global exposure to private credit at €62.5 billion, or 0.2% of assets, while insurers hold about €211 billion and pension funds roughly €52 billion; those exposures are concentrated among a small number of large institutions, especially in Germany, France and the Netherlands. European officials say aggregate figures are no longer enough because risks can be obscured as private-credit assets are repackaged through structures such as collateralised loan obligations, leveraged lending and asset-intensive reinsurance. Euro-area private debt funds carry average leverage of about 40%, and Luxembourg-domiciled private credit funds had €365 billion in assets under management at the end of 2022. Regulators have also moved to collect data comparing private credit ratings with public market equivalents, and some European officials have warned that if fuller information is not shared, supervisors may have to impose stricter capital requirements on the banks they oversee.