Hedge funds and private credit must prepare for tougher regulation. The EU authorities intend to carry out a stress test of the so-called shadow banking sector for the first time in 2026. These non-bank financial intermediaries (NBFIs) have grown significantly since the 2008 financial crisis and have taken on more and more tasks of the classically regulated banking sector. Now the supervisors want to scrutinise them to see if there are any weaknesses among the private markets players.

Concern has arisen due to the growing market power of non-banks, which, according to ECB data, accounted for a quarter of loans in the eurozone at the end of 2023. In addition, there are growing entanglements with commercial banks, whose loans to shadow banks have tripled since 1999, to 6 trillion euros.

The European Systemic Risk Board, European Banking Authority, European Insurance and Occupational Pensions Authority, and others such as the Financial Stability Board, want to find out how these interdependencies develop in stress scenarios – in an exercise planned for next year. The national regulators have not yet drawn up any concrete measures of this kind, but the French central bank and others have already been talking about basic plans for this. However, a Europe-wide stress test of shadow banks could render national exercises obsolete.

In addition to lending standards, the resilience to be sufficiently equipped for additional liquidity requirements in times of crisis will be put to the test. To this end, the Bank of England (BoE) carried out its „system-wide exploratory scenario“ stress test at the end of 2024. The central bank came to the conclusion that, although the non-banks had generally shown good resilience, some players were not adequately equipped to obtain additional liquidity in the event of a meltdown. In addition, distressed sales of assets would exacerbate a market crisis.

This will be a central starting point for the EU stress test for the shadow banks: will the risks spill over to the banks, or can the non-banks absorb shocks in such a way that they help to stabilise the financial system? There have already been risk spillovers from non-bank intermediaries during crisis episodes, the head of ECB banking supervision Claudia Buch recently told the EU Parliament. However, not all shadow banks harbour more risks. They are now endeavouring to identify the risks more precisely in order to address them in a targeted manner.

The ECB is not commenting on the reports of an upcoming stress test. However, financial industry sources suggest that ECB Banking Supervision would be unlikely to take the lead on such a stress test, but rather EBA, ESMA and EIOPA. The European supervisory authorities also recently commented on the macroprudential treatment of non-banks as part of a consultation by the European Commission. In December, the European Systemic Risk Board was tasked with developing a framework that allows a holistic assessment of systemic risks in the EU financial market. There are already recommendations on this, but overall it is still a work in progress. The ESRB and ECB are supporting each other in this endeavour. Parallel to general stress tests, the ECB has already carried out initial scenario analyses on counterparty risks in the non-banking sector.