FRANKFURT – European financial regulators seeking a clearer picture of banks’ exposure to private credit markets are running into resistance from the U.S. Treasury, highlighting a widening transatlantic rift over financial regulation, officials said.
European authorities are increasingly concerned about the global private credit industry, estimated at around $2 trillion in size and largely concentrated in the United States, as well as its lack of disclosure, opaque valuations and complex financing structures.
Recent market tensions, including redemption limits on some funds and a series of high-profile corporate defaults, have heightened concerns about hidden risks pervasive throughout the financial system.
European regulators are requiring the financial institutions they supervise to provide more information about the underlying assets they are exposed to, including details of the borrowers, valuation methods and guarantees backing the investments.
But U.S. Treasury officials are resisting widespread data sharing, saying the information is confidential and additional disclosure requirements would impose an unnecessary burden on companies, according to multiple sources.
“We are sensing resistance from some supervisors around the world,” Bundesbank board member Michael Theller told Reuters.
“There is an argument that they are not allowed to be shared because of legal restrictions. And there is also a general criticism that these are new reporting obligations and new bureaucratic burdens.”
Discussions between U.S. and European regulators took place in international forums such as the Financial Stability Board, other officials said, asking not to be named because the FSB’s deliberations are confidential.
An FSB spokesperson said patchy data and different definitions made it difficult to compare private credit risks across countries, and stressed the need for greater disclosure and common reporting standards.
Some European officials have warned that without more information, regulators may be forced to impose stricter capital requirements on the banks they supervise to cover potential losses.
Spokespeople for the Federal Reserve and the U.S. Treasury declined to comment.
A spokesperson for the U.S. Securities and Exchange Commission, which represents the U.S. on the FSB along with the Federal Reserve and Treasury, said the SEC participates in such forums but takes seriously the confidentiality and legal restrictions on sharing certain information.
The conflict is part of a broader transatlantic divide on a range of issues including international security, climate change, trade, market regulation and technology.
I can’t look into it
European regulators are concerned that there is not enough “investigation” into private credit businesses to understand where the risks ultimately lie.
Recent European Central Bank analysis suggests that total direct exposures are modest. Eurozone banks have an estimated 62.5 billion euros ($71.46 billion) of private credit exposure worldwide, representing just 0.2% of assets, while insurance companies and pension funds hold about 211 billion euros and 52 billion euros, respectively.
These exposures are concentrated in a few large institutions, particularly in Germany, France, and the Netherlands.
But officials say such sweeping assessments are no longer sufficient.
Officials are particularly concerned about the spread of the virus from the United States and are seeking detailed information on the underlying assets, borrowers, valuations and guarantees behind private credit investments.
They say financial risk is becoming increasingly difficult to track as private credit assets are repackaged and redistributed through multiple parts of the financial system, and banks, insurance companies and pension funds are linked in increasingly complex ways.
“There’s a cascade of different investment tiers, such as collateralised debt, leveraged lending and asset-intensive reinsurance, all of which can be combined,” said Bundesbank’s Theurer. “It makes the potential risks less transparent.”
The ECB recently modeled a severe shock to global private credit markets and found that the direct losses were manageable for banks and investors.
But the exercise also showed that the greatest damage will not come from private credit loans themselves, but from broader market declines and write-downs across the financial system.
The findings reinforced regulators’ concerns that aggregate exposure data could underestimate potential risks.
“Where is the money? Where is the risk?” said one European policymaker. “What are the assets underneath and how are they valued?”
In the U.S., Michelle Bowman, the Fed’s vice chair for oversight, said in May that nonbank default and loss rates would have to be “extraordinarily high” to put banks at risk, and that bank loans to private credit companies appeared to be well collateralized.
At the same time, he said the Fed is making reporting requirements for banks more detailed on loans to nonbanks to better assess concentration risk.
(1 dollar = 0.8747 euro)
(Additional reporting by Pete Schroeder in Washington; Editing by Tomasz Janowski)
