EU regulators hit US wall in quest for private credit data

By Francesco Canepa

FRANKFURT, July 10 (Reuters) - European financial supervisors seeking a clearer picture of banks' exposure to private credit markets are running into resistance from the U.S. Treasury, highlighting a widening transatlantic divide over financial regulation, officials say.

European authorities are increasingly concerned about the global private-credit industry estimated at around $2 trillion, with much of it concentrated in the United States, and its limited disclosure, opaque valuations and complex funding structures.

Recent market strains, including redemption restrictions at some funds and a series of high-profile corporate defaults, have heightened concerns about hidden risks spreading through the financial system.

European regulators have been pressing for more information on the underlying assets to which financial institutions they oversee are exposed, including details on borrowers, valuation methods and guarantees backing investments.

But U.S. Treasury officials have resisted broader data-sharing, arguing that information is confidential and that additional disclosure requirements would impose unnecessary burdens on firms, several sources said.

"We feel some resistance from some supervisors around the world," Bundesbank board member Michael Theurer told Reuters.

"There are arguments that they are not allowed to share — they have legal restrictions. And then there is the general criticism that these are new reporting requirements, a new bureaucratic burden."   

The discussions between U.S. and European supervisors have taken place in international forums including the Financial Stability Board, other officials said, declining to be named because FSB deliberations are confidential.

An FSB spokesperson said patchy data and differing definitions make private-credit risks hard to compare across countries, underscoring 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 oversee to cover potential losses.

Spokespeople for the Federal Reserve and the U.S. Treasury Department declined comment.

A spokesperson for the U.S. Securities and Exchange Commission, which represents the United States on the FSB along with the Fed and Treasury, said the SEC participates in such forums but takes the confidentiality and legal restrictions to sharing certain information seriously.

The dispute is part of a broader divide across the Atlantic on a range of matters including international security, climate change, trade, market regulation and technology.

UNABLE TO LOOK THROUGH

European supervisors worry that they lack sufficient "look-through" into private-credit vehicles to understand where risks ultimately reside.

Recent European Central Bank analysis suggests aggregate direct exposures are modest: euro zone banks have an estimated €62.5 billion ($71.46 billion) of exposure to private credit globally, equivalent to just 0.2% of assets, while insurers and pension funds hold roughly €211 billion and €52 billion respectively.

Those exposures are concentrated in a small number of large institutions, particularly in Germany, France and the Netherlands.

Yet officials say such bird's-eye-view assessments are no longer enough.

Authorities are particularly concerned about contagion from the United States and want detailed information on the underlying assets, borrowers, valuations and guarantees behind private-credit investments.

They say financial risks are becoming harder to trace as private-credit assets are repackaged and redistributed through multiple parts of the financial system, linking banks, insurers and pension funds in increasingly complex ways.

"There are cascades of different investment layers — collateralised loan obligations, leveraged lending, asset-intensive reinsurances — and it is possible to combine all of them," the Bundesbank's Theurer said. "That makes the underlying risks opaque."

The ECB recently modelled a severe shock to global private-credit markets and found that direct losses would be manageable for banks and investors.

But the exercise also showed that the biggest damage would come not from the private-credit loans themselves but from broader market selloffs and valuation losses spreading through the financial system.

That finding has reinforced supervisors' concerns that aggregate exposure data may underestimate potential risks.

"Where is the money? Where is the risk?" one European policymaker said. "What kind of assets are underneath and how are they valued?"

In the U.S., Fed Vice Chair for Supervision Michelle Bowman said in May that default and loss rates by non-banks would need to be "abnormally high" to put banks at risk and that bank loans to private credit firms appeared to be well collateralised.

At the same time, she said the Fed was making its reporting requirements for banks more granular regarding lending to non-banks, to better assess concentration risks.

($1 = 0.8747 euros)

(Additional reporting by Pete Schroeder in WashingtonEditing by Tomasz Janowski)