(June 15): The European Central Bank (ECB) has doubled the number of banks covered by a probe into links with private credit, as the sector faces a slump in investor confidence.
This year, the ECB is asking more than 20 banks for more details on their exposures, up from a dozen in previous exercises, people familiar with the matter said. Those with meaningful ties to private credit will have to report details on an annual basis, the people said, who asked to remain anonymous as the interactions aren’t public. An ECB spokesman declined to comment.
While the ECB’s monitoring builds on similar work in the past two years, attention on the industry has been heightened in recent months as a number of funds have been forced to impose limits on withdrawals. The watchdog is concerned about deficiencies in how traditional banks capture their exposure to private credit, despite it being smaller in the euro area than in the US.
Exposure to private credit is dominated by four lenders in Europe, with Deutsche Bank AG, Barclays plc, BNP Paribas SA and HSBC Holdings plc accounting for almost two-thirds of the sector total, according to Bloomberg Intelligence. Yet that’s “a manageable risk” given that disclosed exposures account for just 2.3% of loans, BI said last month.
“Exposures remain relatively contained compared with other assets on banks’ books, but they are growing strongly,” Sharon Donnery, a member of the ECB’s Supervisory Board, said in a speech last week. “The key issue is not only the size of these exposures, but also banks’ ability to aggregate them properly.”
That means identifying where banks lend alongside private credit funds, and when they have overlapping exposures across funds, investors and portfolio companies, she said. “Weaknesses in this area can make it harder for banks to identify concentrations, correlations and transmission channels under stress,” Donnery said.
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The US$1.8 trillion ($2.31 trillion) private credit industry has grown over the past two decades partly as a means to channel credit from outside the more-regulated banking sector to riskier parts of the economy. Banks are however still exposed to many private credit funds, including by adding leverage to boost returns.
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