Europe's financial stability watchdog examining private credit risks, adviser says

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By Naomi Rovnick

LONDON, July 9 (Reuters) - The EU's financial stability watchdog is examining the risks private credit poses to the region's banks and economy, one of its advisers said, and may recommend regulators be given greater direct oversight of the $3.1 trillion shadow lending industry.

Richard Portes, a member of the European Systemic Risk Board's advisory committee and co-chair of a recently launched credit taskforce, told Reuters it is focusing on the role of private credit in the macro-economic cycle.

This would involve assessing private credit's potential to spread or amplify financial shocks and its interconnectedness with Europe's financial system, he said. 

"It is those linkages that we as the ESRB and any macro-prudential authority will worry about. We want to know where the interconnections are. And honestly, not much is yet known about that," Portes said. 

Private credit's expansion began as a means of funding private equity groups' buyouts after the 2008 financial crisis saw bank financing dry up. It then swelled into a prime source of debt financing for riskier businesses, drawing in capital from income-hungry investors.

Though still tiny compared with the traditional banking industry, the sector has been dogged by concerns over the quality of lending standards and a lack of transparency. 

REGULATORS STRUGGLING TO ASSESS POTENTIAL DANGERS

The ESRB, which is responsible for the macroprudential oversight of the EU financial system, has previously warned about non-bank vulnerabilities in its regular monitoring reports. But it could now recommend regulation, Portes said. 

"ESRB could recommend to (the European Securities and Markets Authority), the European Commission, or national regulators that they exercise their legal powers to regulate private credit," he said. 

While the ESRB publishes recommendations, supervisors are not required to follow them.

Regulators have struggled to assess the potential dangers to banks due to a dearth of data and the inability to force the unregulated industry to disclose information.    

The Bank of England said in a financial stability report on Tuesday that systemic risks from private credit were increasing.

The European Central Bank, whose head Christine Lagarde also chairs the ESRB, said in May that the euro zone was not facing a systemic risk from recent turbulence but that some pockets of the financial system were exposed.

And on Monday, the European Stability Mechanism, the region's top crisis fund, said the rapid growth of private credit was a vulnerability for the euro area. 

(Reporting by Naomi Rovick; Editing by Tommy Reggiori Wilkes and Joe Bavier)