NBFI cross-border flows squeeze euro area firm financing

Non-bank financial institutions (NBFIs) have significantly increased their securities holdings, from €11 trillion in early 2018 to €17 trillion by the end of 2025.

However, their portfolios are increasingly shifting towards foreign assets, particularly US equities.

Since late 2023, euro area NBFIs boosted US corporate equity allocations by 2.7 percentage points through net purchases, while reducing euro area corporate equities by 1.5 percentage points.

Concurrently, banks have channeled more lending to NBFIs, reaching 11 percent of total assets by end-2025.

A substantial share of these bank loans is directed to entities operating outside the euro area, diverting credit from domestic firms.

The portfolio shifts by non-bank financial institutions (NBFIs) directly constrain euro area firm financing.

Research indicates that as NBFIs increase their allocation to US corporate equities, there is a corresponding reduction in their holdings of euro area equities.

This suggests a substitution effect that squeezes out European equity financing.

Concurrently, banks are increasingly directing their lending towards NBFIs, often to entities outside the euro area, rather than to domestic firms.

Studies show this reallocation of bank credit significantly reduces firms' access to loans, a shortfall difficult to compensate.

This trend aligns with banks' reported risk-averse attitudes in an uncertain geopolitical climate.