- EU plans first system-wide stress test for non-bank financial institutions
- Focus includes hedge funds, insurers, pension
funds, private credit groups
- Regulators fear contagion from opacity and
fast-growing non-bank lending
- Non-banks now hold 25% of €19tn eurozone loan
stock
- Lending to non-banks by eurozone banks tripled
since 1999
- ECB warns of liquidity risk spillovers from the NBFI
sector
- Archegos, energy trader crises highlight
systemic exposure
- Stress test expected to launch in 2025
- France and other national authorities are planning
similar moves
- EU delays new bank capital rules pending US
clarity
European regulators are preparing their first system-wide stress test focused on the sprawling world of non-bank financial institutions, signalling a new phase of scrutiny for hedge funds, private equity, pension funds, and insurers.
The initiative aims to uncover hidden vulnerabilities in a sector that now accounts for one quarter of the eurozone’s €19 trillion in outstanding loans, according to the European Central Bank.
The move, still under discussion among top EU financial authorities, reflects mounting concern over the speed and opacity with which credit has migrated away from traditional banks since the 2008 financial crisis.
Sources involved in the planning say the test could be launched as early as next year, expanding on stress-testing practices currently limited to individual financial sectors.
The planned exercise echoes a similar initiative by the Bank of England, which last year modelled a hedge fund default and its knock-on effects across more than 50 City of London institutions.
While the UK regulator found resilience in liability-driven investment funds, it also flagged the danger of fire sales and unrealistic expectations around liquidity during market turmoil.
EU officials now want to run their own version of this “system-wide exploratory scenario” to assess how shocks might cascade across the financial system, and whether they might amplify rather than absorb economic stress.
Discussions involve the European Central Bank, the European Banking Authority, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority, and the European Commission.
A particular area of focus is money market funds, which regulators say are operating under laxer liquidity requirements than those in the UK or US.
There is also concern over the interconnectedness between regulated banks and these non-bank entities. Lending by eurozone banks to non-bank financial firms has tripled since 1999, reaching €6 trillion by the end of 2023.
The urgency is driven in part by recent crises that exposed the fragility of the non-bank sector.
These include the collapse of Archegos Capital Management, the liquidity crunch among energy traders following Russia’s invasion of Ukraine, and the pandemic-triggered dash for cash in bond markets.
“We’ve seen crisis episodes where liquidity risk spillovers came from the NBFI space,” said Claudia Buch, chair of the ECB’s supervisory board, during a recent hearing at the European Parliament.
While she noted not all non-bank firms are riskier than banks, she stressed the need for targeted regulation.
France has already announced plans for its own stress test of non-bank financial intermediaries, suggesting the EU-wide effort could be complemented by national initiatives. Officials hope the coordinated response will offer a clearer picture of systemic risks and improve cross-border regulatory alignment.
In a separate but related development, the European Commission said Friday it would delay implementing stricter capital rules for banks’ securities trading arms until early 2027.
The decision allows the EU to wait for clarity on whether the US will follow through with Basel Committee recommendations, keeping international competitiveness in focus as regulatory efforts broaden.
For now, the message from Brussels is clear: the era of light-touch oversight for non-bank financial players may be drawing to a close.