Banking
ECB wants banks to better manage private equity risk
Published by Jessica Weisman-Pitts
Posted on November 13, 2024
2 min readLast updated: January 28, 2026
Global Banking & Finance Review®
Company
Published by Jessica Weisman-Pitts
Posted on November 13, 2024
2 min readLast updated: January 28, 2026
FRANKFURT (Reuters) – Euro zone lenders may not have a full understanding of their exposure to the quickly growing private credit and equity markets, so bank supervisors plan to outline new risk management expectations, the European Central Bank said on Wednesday.
Private credit funds have grown quickly in recent years, partly using bank finance, while private equity funds are taking on greater leverage, creating a more opaque environment in which banks may not fully understand their actual exposure, the ECB said after surveying lenders.
The failure to properly identify – on an aggregate level – exposures to companies that also borrow from private credit funds means that this exposure is almost certainly understated and the concentration risk cannot be properly identified and managed,” the ECB said in a Supervision Newsletter.
A key problem is that a bank may be a co-lender to a portfolio company, which also relies on private credit funds, where the same bank could have exposure via a different channel.
“Banks typically manage such risks either at product type level or at client type level,” said the ECB, which directly supervises just over a 100 of the euro area’s biggest banks. “This approach fails to holistically capture the risks generated by these exposures.”
Other issues include excessive reliance on valuations provided by funds and data scarcity given the often opaque nature of the private equity and private credit markets, the ECB said.
To mitigate this risk, the ECB plans new supervisory expectations for the risk management of exposures to private equity and private credit funds, it said.
Banks will be asked to submit information on their risk management approach as well as a gap assessment against the ECB’s expectations,” it said.
The ECB will then follow up with banks on an individual basis to ensure that the supervisory expectations are met.
(Reporting by Balazs Koranyi; Editing by Alexandra Hudson)
Private equity refers to investment funds that buy and restructure private companies. These funds typically invest in companies not listed on public exchanges, aiming for high returns through management improvements and eventual resale.
Risk management is the process of identifying, assessing, and controlling threats to an organization's capital and earnings. It involves strategies to minimize potential financial losses and ensure regulatory compliance.
Credit risk is the possibility of loss due to a borrower's failure to repay a loan or meet contractual obligations. It is a significant concern for banks and financial institutions.
Financial stability refers to a condition where the financial system operates efficiently, with institutions able to withstand economic shocks without significant disruptions to the economy.
Banking regulation comprises laws and guidelines that govern the operations of banks and financial institutions. These regulations aim to maintain financial stability, protect consumers, and ensure the integrity of the financial system.
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