Market News

(Bloomberg) -- The European Central Bank is pressing top lenders for more details on their dealings with private credit firms, people with knowledge of the matter told Bloomberg News, in the latest global effort to inoculate the traditional financial sector from a potential shadow banking crisis. 

The ECB has asked banks for details of their exposure to private credit firms as well as their lending to funds operating in the space. Two of the people said that major German and French lenders were included among the group. A spokesperson for the ECB declined to comment.

Private credit has become a key focus for regulators globally in recent years, as banks’ retreat from certain types of lending after the financial crisis fueled its rapid rise.

Watchdogs including the Financial Stability Board are examining how private markets interact as part of wider investigations into shadow banking. They’re also looking at how these markets connect with the traditional financial sector, with a view to developing policies to curb risk.  

Other concerns about the industry include private credit valuations, the use of leverage and the fact that almost 40% of funds don’t have skin in the game.

The Bank of England has repeatedly warned about the potential dangers from the sector, which it believes grew “even faster” than its official rate of the more than four-fold increase officially reported from 2015. The asset class is now generally estimated to be about $1.7 trillion to $1.8 trillion in size, though the Bank for International Settlements suggested earlier this year that it may have reached $2.1 trillion.

“The increasing role played by non-bank finance in the provision of credit is a feature of the financial system, not a bug, and a welcome feature if undertaken on a sustainable basis,” the BoE’s financial stability director Lee Foulger said in a January speech.  

“Past stresses have demonstrated how in favorable market conditions business model risks can build up and interact with system wide vulnerabilities in a way that can impact credit provision to households and businesses and impact upon systemic institutions and markets when conditions worsen.”

Regulators are also looking at private equity’s links to banks, including the BOE’s recent scrutiny over the net-asset-value loans that allow buyout funds to borrow against a pool of companies they own.