Growing Concerns Over Financial Interlinkages Between NBFIs and Traditional Banks
Recent studies have revealed substantial connections between non-bank financial institutions (NBFIs) — which encompass hedge funds, private equity, and private credit — and the conventional banking sector, reports 24brussels.
A paper presented at the European Central Bank’s research conference in Sintra, Portugal, highlighted that nearly 10% of assets held by banks within the European Union are claims on NBFIs, while 10-15% of bank deposits originate from non-banking entities. The authors noted that these interlinkages allow for rapid propagation of financial shocks across various segments, particularly when multiple institutions react concurrently to market pressures.
Loriana Pelizzon, deputy scientific director at the Leibniz Institute for Financial Research and co-author of the paper, expressed measured optimism regarding two recent bankruptcies within the auto financing market, given its relatively modest scale. However, she emphasized the necessity of vigilantly monitoring the connections between European NBFIs and the U.S. financial ecosystem, owing to the significant magnitude of investments involved.
“There’s a significant amount — trillions and trillions invested — in the U.S.,” Pelizzon noted, pointing out the intricate and lengthy investment chains that often elude regulatory oversight.
Davide Oneglia, director at economic consultancy TS Lombard, raised concerns about the potential risks within the private credit sector, particularly if U.S. interest rates remain elevated longer than anticipated due to persistent inflation, which could strain private credit providers further. “The question is whether this is just a couple of rotten apples,” Oneglia cautioned.
Market Volatility on the Horizon
The apprehension surrounding private credit is compounded by concerns over the U.S. stock market’s valuation. The S&P 500 index is now trading at close to 30 times the expected earnings of its constituents, significantly exceeding its historical average. This valuation is reminiscent of the extreme bubbles witnessed during the Dotcom era and the recent pandemic phase.
