Bank-NBFI interconnections reshape credit market risk landscape
Patrick Montagner, Member of the Supervisory Board of the ECB, highlighted the growing risks from interconnections between banks and non-bank financial intermediaries in fragmented credit markets. He emphasized that these linkages redistribute risk in less transparent ways, posing challenges for banking supervision.
The tangled web of bank-NBFI lending
The economy's financing has diversified beyond traditional banking, with non-bank financial intermediaries (NBFIs) playing an increasing role.
However, this has not reduced banks' exposure; instead, interconnections have grown, creating less transparent risk pathways.
Banks engage in private markets through various channels, including direct lending to private equity and credit funds, providing credit lines to portfolio companies, and offering prime brokerage services.
The ECB's 2024 exploratory review highlighted that banks often cannot systematically identify co-lending alongside private credit funds to the same company.
This lack of visibility can lead to underestimated concentration risks and mismanaged exposures, as combined positions may be substantially higher than individual assessments suggest.
Supervisory blind spots and data gaps
Supervisory tools face significant challenges in addressing risks from bank-NBFI interconnections.
Existing frameworks struggle to capture complex instruments and layered risk structures.
Data gaps remain a primary impediment to comprehensive risk assessment, despite ECB initiatives to close them.
Monitoring exercises reveal difficulties in capturing layered leverage across investment chains.
Furthermore, consolidated and forward-looking data on NBFI exposures, fund-level leverage, and redemption structures are still insufficient.
This limits the ability to assess shock propagation or conduct effective system-wide stress tests, underscoring the need for improved data sharing and coordination among authorities.
A growing risk, not yet contained
The increasing interconnections between banks and non-bank financial entities represent a significant, yet often opaque, challenge to financial stability.
While supervisors are aware of the issue, current frameworks and data remain insufficient to fully capture and mitigate these layered risks.
Urgent action on data sharing and coordinated oversight is essential to prevent future systemic vulnerabilities from materializing.