In today’s “Autumn 2026 risk update”, the ESAs classify private credit as one of the central vulnerabilities of the EU financial system: the sector is growing rapidly, is opaque and is becoming increasingly intertwined with the rest of the financial system. They point to inaccurate credit valuations, high credit risk, unresolved leverage and data gaps. The warning is justified, but it must not be allowed to obstruct this source of financing. The objective must be financial stability while preserving the opportunities this market offers, as that is what serves the real economy best.
The gap that private credit fills
Rising capital requirements have pushed banks out of parts of the corporate lending market. Private credit fills this gap. It is growing dynamically, yet remains considerably smaller than the bank lending and bond markets, and it reaches segments that can no longer be served economically on a bank-based model. For the real economy, this is good news:
- Mid-sized enterprises without access to the capital markets obtain fast, flexible liquidity and long-term capital in bespoke structures.
- Beyond bank syndications, in some cases without amortisation, private credit supports growth and buy-and-build strategies where the house bank reaches the limits of its own capital.
- Credit funds bring risk appetite and institutional capital to where bank financing is less economical.
- Insurers, pension schemes and, increasingly, retail clients finance long-term floating-rate structures with stable cash flows, which are particularly attractive for infrastructure and project finance.
Politically, this function has long been recognised: the very first Capital Markets Union Action Plan of 2015 emphasised the role of funds in financing the (green) transformation. Private credit was thus intended from the outset as a building block of a capital-markets-based financing architecture complementing the banks.
The ESAs’ justified concerns – and why they should be taken seriously
Valuation gaps, opaque leverage chains, potential hidden maturity transformation and data gaps continue to hamper risk analysis (see TSI kompakt of 13 March 2026). The transparency point in particular strikes at the heart of the matter: a supervisor that cannot see exposures and interconnections cannot safeguard financial stability. The objection that valuations of illiquid assets could turn out to be systematically too optimistic in periods of stress is also well founded. Given the segment’s small size, systemic risk arises primarily through channels such as the interconnectedness with banks and insurers. Banks may well earn higher returns on from funds finance than from direct lending, thereby financing a substantial share of the market. Greater transparency is therefore not overregulation, but a prerequisite for the long-term confidence of institutional investors.
Towards greater transparency in transformation finance?
Long-term buy-and-hold capital is structurally well suited to private credit, without conventional maturity transformation. What is problematic are liquidity mismatches in open-ended funds holding illiquid assets, as well as revolving structures in which loans are passed on to the next fund without amortisation. Appeals will not help here; what is needed is transparency and risk discipline. That is precisely what the regulation already under way aims at.
The best example is AIFMD 2.0: for loan-originating AIFs (lending as the main strategy or at least 50% of NAV), hard statutory requirements on portfolio quality, origination policies and risk management will apply for the first time from April 2027. A uniform European framework could build confidence and discipline opaque business models. This poses no threat, but rather the professionalisation the market needs for its second growth phase.
In addition, the EBA is consulting on classifying large investment firms with total assets above EUR 30 billion as credit institutions. This is a sensible step towards closing the grey areas between fund and bank regulation without calling the business model into question. Early, constructive engagement by the market is a prerequisite for this.
Cooperation rather than disintermediation – under close supervisory scrutiny
An answer to the ESAs’ concerns is already visible in the market: banks provide origination and lending expertise, funds provide capital and risk appetite. Because funds finance may offer return advantages, this interconnection deserves the supervisors’ attention. The same applies to securitisations: they broaden the investor base, but may add a further layer of leverage. Information must not as a result reach the investor too late.
Conclusion: growth and maturation
Private credit is no longer a niche topic. As a fast-growing, albeit still small segment, it is shaping corporate finance, particularly among mid-sized companies. The ESAs’ call for vigilance is justified and by no means hostile to the market, for it protects the stability on which this funding source can grow. The market would do well to heed it: with independent, timely valuations, transparency on leverage and portfolio quality, and capital that is institutional rather than retail-like in character. With AIFMD 2.0, a statutory framework will exist for the first time from April 2027. The task of policymakers and supervisors is to monitor the risks without weakening a source of financing that sustainably fills the gap in bank-based corporate lending.
Links:
ESAs Call for Vigilance Regarding External Dependencies, Cyber Threats, and Private Credit Risks