• CONTRIBUTION

Banking supervision in a fragmented credit market: interconnections matter

Contribution by Patrick Montagner, Member of the Supervisory Board of the ECB, for Eurofi Magazine

Frankfurt, 24 March 2026

Non-bank credit growth has redistributed risk without excluding banks

The financing of the economy has never been a monopoly of the banking sector. Over the past decade, however, banks’ share of total lending has declined. [1 ] This diversification appears to have distributed risk more broadly across the financial system. But the reality is more complex. While other financial actors have become increasingly active in credit markets, banks have not been excluded. On the contrary, banks and other financial actors have become more interconnected, spreading risks in ways that are less transparent and difficult to monitor.

Banks participate in private markets through multiple channels: lending to private equity and private credit funds, providing credit lines to portfolio companies alongside these funds, offering prime brokerage services and maintaining derivative exposures. Banks consequently retain substantial direct exposures while simultaneously acting as intermediaries and service providers to non-bank entities. This business model coexists with traditional lending rather than replacing it.

The ECB’s 2024 exploratory review [2 ] revealed that banks cannot systematically identify transactions where they lend alongside private credit funds to the same company. This means banks may not always have a full picture of their total exposure to a single borrower or group. As a result, concentration risks can be underestimated and mismanaged. When a bank lends both to a private credit fund and directly to companies in that fund’s portfolio, the combined exposure may be substantially higher than when either position is viewed in isolation.

Supervisory tools face challenges in addressing bank-NBFI risks

Existing frameworks struggle to capture complex instruments in which risk is layered across multiple entities and legal structures.

Data gaps prevent comprehensive risk assessment, although this is improving. The ECB has launched several initiatives to close these gaps. A dedicated monitoring exercise on banks’ exposures to private markets highlighted the challenge of capturing layered leverage structures where borrowing occurs at multiple points along investment chains, from fund investors to portfolio companies. An exploratory scenario analysis on counterparty credit risk focusing on NBFI-related vulnerabilities revealed significant variation in banks’ risk profiles, with differences in collateral practices having considerable influence on stress outcomes.

Existing supervisory data do not yet provide a sufficiently consolidated and forward-looking view of banks’ exposures to NBFIs and private assets. Information on fund-level leverage, portfolio composition and redemption structures is often limited. This makes it difficult to assess how shocks could propagate through the system or to conduct stress tests that capture second-round effects.

The temptation to distribute risk to retail investors requires vigilance on conduct standards

There may be a temptation to broaden the circle of risk holders by distributing private market products to retail investors. This requires caution. If conflicts of interest lead to mis-selling, as occurred in the 2008 financial crisis, the consequences can extend beyond financial stability, affecting social and political domains.

To mitigate these risks, regulatory frameworks must ensure adequate disclosure and conduct standards, particularly with regard to conflicts of interest. The complexity, illiquidity and opacity of private credit structures make them particularly ill-suited for investors who lack the resources to conduct proper due diligence or the financial capacity to absorb losses.

The ECB monitors interconnections within its mandate

The oversight and regulation of NBFIs, particularly the largest ones with global operations, fall under the responsibility of authorities outside European banking supervision. However, we monitor the connections between banks and NBFIs to assess risks from a banking perspective. Our focus is on banks’ risk management practices regarding exposures between banks and NBFIs, including identification and monitoring, concentration limits and stress-testing capabilities. This approach allows banking supervision to contribute to containing systemic risks linked to the non-bank sector without extending bank-style regulation to market-based finance. Instead, we ensure that banks maintain robust risk management standards in their NBFI-related activities.

European banking supervision cannot cover all non-bank systemic risks alone. The macroprudential framework for NBFIs needs to be strengthened through improved data sharing, enhanced coordination among authorities and the development of system-wide stress testing. This requires both entity and activity-based approaches to ensure that regulatory frameworks capture risks wherever they arise and remain adaptable to financial innovation. International cooperation is essential, given the global nature of NBFI activities, diverse legal statuses and cross-border spillovers.

1. Financial Stability Board (2025), Global Monitoring Report on Nonbank Financial Intermediation, 16 December.
2. ECB (2024), “ Complex exposures to private equity and credit funds require sophisticated risk management ”, Supervision newsletter, 13 November. CONTACT ## European Central Bank

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