The European Central Bank (ECB) does not believe that a collapse in the private credit market alone would cause systemic financial instability, according to a new document.

A special feature, released on Tuesday in response to growing concerns over national financial systems’ exposure to private credit risk, suggests that the relatively small volumes of private credit in the eurozone would insulate it from a systemic crisis were the market to experience a shock.

According to ECB data, banks in the eurozone have €62.5 billion exposed to private credit worldwide, which equals only 0.2 per cent of their total assets, or 2.5 per cent of their total equity. Insurance and pension funds are more highly exposed in relative terms, with 2.3 and 1.4 per cent respectively of their total assets reliant on private credit markets.

Though these numbers are small, they are highly concentrated in a small number of large institutions, the ECB said. Under its model of a “simulated severe shock”, which combines a sharp increase in private credit sector loans with a particularly severe shock to the software sector, insurers and pension funds would fare the worst.

Insurers could lose more than €300 billion in this scenario, while pension funds could face more than 5 per cent of their total assets disappearing when second-order effects are taken into consideration.

However, the long investment horizons and low run risk of funds and insurers means they are relatively well positioned to weather losses of this size, limited the systemic risk from such a shock, according to the ECB.

The report also laid out differences between private credit and the subprime mortgage market prior to its collapse in 2007, which triggered the 2008 financial crisis.

The ECB noted that although US the private credit market is of a comparable size to the subprime mortgage market prior to the financial crisis of 2008, sitting at $1.4 trillion at the end of 2024, it only represents 4.7 per cent of US GDP. The $1.5 trillion subprime market in 2006 made up more than 10 per cent.

The bank added that private credit is a longer-term investment and thus not subject to such a large run risk, and that eurozone banks’ exposure to the US market is smaller in this case than it was in 2007.

The emerging technology of AI, and its spectacular growth, may change this equation, however. If private credit becomes an important part of the funding for AI data centres and AI-related firms, the bank said, EU exposures to private credit could rise rapidly. In a scenario where the predicted productivity gains from the technology fail to materialise, this sector could become a serious credit risk.

The bank concludes with similar recommendations to the Financial Stability Board’s earlier in the month, stressing the importance of reducing opacity and liquidity mismatches.

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