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I am honoured to be taking part in today’s conference on counterparty credit risk (CCR) management. It is a valuable opportunity to share best practices and bring together representatives from the banking industry, the supervisory community and the broader economy.
In my remarks, I would first like to clarify why I consider sound CCR management to be so critically important at the current juncture. And I very much welcome the chance to highlight a few concerns and inspire some critical thinking at this CCR outreach event.
Second, I would like to explain the ECB’s approach to supervising CCR, drawing on the report on sound practices in CCR governance and management that we published last autumn.
And third, I would like to provide a brief update on what we have seen in the European banking sector since publishing our report.
Much has been written and said about the exponential growth of the non-bank financial institution (NBFI) sector and the shift in lending from the traditional banking sector to other market participants.
Since the global financial crisis, the NBFI sector in the euro area has doubled in size, from €15 trillion in 2008 to €32 trillion today. It now accounts for half of the financial sector, although the size of the global NBFI sector has recently decreased slightly against a backdrop of higher interest rates and lower asset valuations.[1]
We have seen significant increases globally for some asset classes such as private equity, where assets under management have grown from around USD 3 trillion in 2012 to around USD 8 trillion today. We have also seen substantial global growth in private credit funds, which now stand at more than USD 1.5 trillion. The European private credit market, while considerably smaller than the US market, has grown by 79% over the past five years.[2] At the end of 2022, the private credit market accounted for about USD 221 billion, or 15% of the global market. These numbers matter and are the reason why we are taking a closer look at the combined growth in the private equity and private credit markets.
The opacity of these markets, however, makes it hard to gauge the inherent risks. More worryingly, we have only a limited line of sight into potential indirect links between banks and non-banks and between non-banks and other non-banks, such as the correlation to common concentrations of exposures.[3] Banks and non-banks are interconnected in many different forms through loans, securities, derivatives and funding relationships, so this could become a source of systemic risk.
The rationale for ensuring that we fully understand risks emanating from the nexus between market risk and credit risk is not new. As New York Superintendent of Banks, I lived through the days of the default of Long-Term Capital Management (LTCM), when we learned our lessons the hard way: not only how these risks can become intertwined and amplify each other in times of stress, but also how financial stress in a highly leveraged NBFI can spill over to the banking sector....
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