The European Central Bank published a Working Paper analysing how euro-area banks’ expanding lending to non-bank financial institutions (NBFIs) affects credit supply to the real economy, finding that the shift has largely supported securities funding rather than firm lending and is associated with a contraction in credit to non-financial firms. Using supervisory and loan-level data (including AnaCredit) for 2019–2024, the paper documents that bank lending to NBFIs rose to more than EUR 3.1 trillion (about 63% of total bank lending to firms) and grew by nearly 60% over the period, while lending to non-financial firms increased by about 20% and stagnated after 2022. The increase was driven primarily by reverse repurchase agreements, which accounted for 45% of bank-to-NBFI lending by 2024 and were concentrated among investment funds such as hedge funds; transaction data from the Money Market Statistical Reporting dataset indicate that 83% of reverse repos were secured by government bonds. Loan-level results show a post-2022m12 rise in lending to investment funds relative to non-financial firms and a disproportionate increase in hedge-fund borrowing concentrated in reverse repos, including non-euro currency transactions and low-haircut collateral, consistent with increased demand to fund government securities amid quantitative tightening and higher sovereign issuance. On bank balance sheets, NBFI lending is found to crowd out lending to non-financial firms more than other assets, with a one percentage point increase in NBFI lending associated with an estimated 0.55 percentage point decline in firm lending. Firm-level evidence suggests that borrowers connected to banks that expanded NBFI exposures experienced larger declines in loans and total debt, particularly smaller firms. The paper links the reallocation to banks’ capital and liquidity constraints, noting that NBFI loans have lower default probabilities and regulatory costs, and finds stronger post-2022 increases in NBFI lending among banks with lower capital ratios, greater deposit outflows, or greater exposure to ECB liquidity tightening.
European Central Bank 2026-04-16
European Central Bank working paper finds growing bank lending to non-banks via reverse repos has crowded out euro area corporate credit
The European Central Bank published a Working Paper finding that euro-area banks’ expanding lending to non-bank financial institutions has largely supported securities funding and is associated with a contraction in credit to non-financial firms, particularly smaller firms. Using supervisory and loan-level data for 2019–2024, the paper shows bank lending to non-bank financial institutions rose to more than EUR 3.1 trillion and increasingly took the form of reverse repurchase agreements, while lending to non-financial firms stagnated. The study links this reallocation to banks’ capital and liquidity constraints, with non-bank financial institution loans offering lower default probabilities and regulatory costs and crowding out firm lending.