Industry faces growing pressure as European regulators move beyond traditional oversight
European financial regulators are preparing to launch their first stress test targeting non-bank financial institutions, in a move that reflects rising concern about the growing influence of lightly regulated entities such as hedge funds and private equity firms.
The European Union’s financial watchdogs are in discussions to design a system-wide test that would evaluate how a market crisis could affect non-bank sectors, including pension funds and insurance companies. If approved, the exercise could begin as early as next year, sources revealed in a Financial Times report.
EU plans sweeping stress test of non-banks https://t.co/gTZ5TQFwK6
— FT Europe (@ftbrussels) May 27, 2025
“We’ve seen some crisis episodes… where liquidity risk spillovers came from the NBFI, non-bank financial intermediation space,” said Claudia Buch, chair of the European Central Bank’s supervisory board, in a recent address to the European Parliament. “So, it’s important that this is also well understood and well regulated.”
The stress test proposal is likely to intensify concerns among hedge funds, private credit players and money market funds, which may face increased regulatory oversight in the future. The initiative follows a similar move by the Bank of England, which last year conducted its first stress test involving non-bank firms. The European effort is aimed at understanding how shocks may travel through the financial system and identifying whether non-bank firms could amplify stress, rather than cushion it.
The Bank of England’s exploratory scenario exercise included over 50 City of London institutions and modelled the hypothetical collapse of a hedge fund. While the findings showed strong resilience among pension funds’ liability-driven investment strategies, the central bank cautioned that forced asset sales could deepen a crisis, particularly given widespread misjudgements about cash availability during times of stress.
Since the 2008 financial crisis, more lending has shifted away from traditional banks to firms that offer similar services without facing equivalent oversight. These non-bank entities held around €4.75 trillion (£3.98 trillion) in loans by the end of 2023, approximately one-quarter of the Eurozone’s total loan book, according to the European Central Bank. The ECB noted that insurance firms and pension funds are playing a growing role in direct lending.
At the same time, Eurozone bank exposure to non-bank financial entities has surged, tripling since 1999 to €6 trillion (£5.03 trillion) by the end of last year. Authorities are increasingly wary of the hidden risks and interconnections these relationships pose.
The sector has been at the centre of several high-profile financial disruptions in recent years. These include the 2020 “dash for cash” during the COVID-19 market panic, the collapse of Archegos Capital Management in 2021, and a liquidity crunch faced by energy traders after Russia’s invasion of Ukraine.
“So not all NBFIs are more risky than banks or other financial institutions, but we need to address the risks there in the right way and also the regulation needs to be targeted to those risks,” Buch added.
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