Europe’s financial stability watchdog is examining the risks that private credit poses to the region’s institutions and economies and may recommended that regulators be given greater power over the sector, Reuters has reported.

Richard Portes, a member of the European Systemic Risk Board's advisory committee and co-chair of a recently launched credit taskforce, told the outlet that the board is looking at the $3.1 trillion industry’s impact on the macro-economic cycle.

This process will involve assessing private credit’s potential to spread or amplify financial shocks within the bloc, and its interconnectedness with the continent’s wider financial system, he told Reuters.

“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.

The ESRB has warned about risks posed by non-financial institutions in previous monitoring reports but could now recommend regulation, according to Portes.

“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 told Reuters.

These recommendations are not legally binding.

His comments come just two months after the EU’s central bank, which shares a chair with the ESRB, said it does not believe that private credit poses a systemic risk to the bloc’s financial system.

Private credit has faced increased scrutiny by watchdogs across the globe in recent months after its opaque balance sheets and complex interlinkages with the regular banking sector led the international Financial Stability Board to warn that it posed a threat to the global economy.

---