The Transparency Gap: Europe Is Now Regulating Private Credit Blind, and Washington Is Making Sure It Stays That Way

John Grey — Private credit and macro desk

The European Central Bank publishes a number every quarter for euro-zone banks' exposure to the global private credit market. The current figure is EUR 62.5 billion, or roughly 0.2 percent of banking-system assets. Insurers, the ECB estimates, are running about EUR 211 billion of exposure. Pension funds are somewhere near EUR 52 billion. Those numbers look small in a monetary union whose banking system is measured in the tens of trillions. They also happen to be inferences. The underlying data that would let a European supervisor confirm them sits on the balance sheets of US-domiciled asset managers, and the US Treasury will not release it. That is the story that broke through the noise of a slow trading week, and it is the story most of the buy side has not yet repriced.

Two Reuters pieces, published on the ninth and tenth of July, framed the problem cleanly enough that even the softer end of the sell side is now paying attention. The first, dated 9 July, ran an interview with Richard Portes, a member of the European Systemic Risk Board's advisory committee and co-chair of a newly launched credit taskforce inside the ESRB. Portes described a body that has spent the last several months attempting to map the interconnections between private credit vehicles and the European banking system, and has largely failed to do so.

"It is those linkages that we as the ESRB and any macro-prudential authority will worry about," Portes told Reuters. "We want to know where the interconnections are. And honestly, not much is yet known about that."

The Portes interview matters less for what it says than for who says it. The ESRB advisory scientific committee is the most respected macro-prudential body in the European supervisory architecture, and Portes is a former Bank of England adviser and one of the more careful voices in it. When he says the interconnections are unknown to the regulator, the honest read is that the risk to the European financial system from an American private credit shock is a large unknown that has been treated as a small known.

The Bundesbank stops being diplomatic

The second Reuters piece, published 10 July, is the harder read. Francesco Canepa reported that Michael Theurer, a member of the Bundesbank's executive board, has become openly frustrated with the pace of transatlantic data-sharing on private credit exposures. The framing was blunter than the usual European regulatory euphemism.

"We feel some resistance from some supervisors around the world," Theurer told Reuters. "There are arguments that they are not allowed to share — they have legal restrictions. And then there is the general criticism that these are new reporting requirements, a new bureaucratic burden."

Theurer went further on the mechanics of the opacity itself. In the same interview he described the layered structure that has made private credit exposure hard to observe even when the underlying data is nominally available.

"There are cascades of different investment layers — collateralised loan obligations, leveraged lending, asset-intensive reinsurances — and it is possible to combine all of them. That makes the underlying risks opaque."

Read carefully, Theurer is describing three separate problems layered on top of one another. First, the raw exposure data itself is held by US managers and their prudential supervisors. Second, even when portions of that data are shared, the exposures are wrapped inside CLOs, leveraged loans and asset-intensive reinsurance vehicles that themselves obscure the underlying credit. Third, the political appetite in Washington to compel disclosure has, on the Bundesbank's reading, gone the other way. That is not a communications problem. It is a structural bifurcation of the transatlantic supervisory regime that has been building since the current US administration took office and has now become the defining feature of private credit as a systemic asset class.

What the numbers mean when you can't see the numbers

The comparative exercise is instructive. The global private credit industry is now valued at somewhere between $2 trillion and $3.1 trillion, depending on which slice of the market one includes. The Reuters 10 July piece uses the $2 trillion figure; the Reuters 9 July piece uses $3.1 trillion. Both are defensible. The $2 trillion number is the narrower direct-lending measure; the $3.1 trillion figure captures the full "shadow lending" perimeter that the ESRB is worried about. The market has roughly quadrupled since the 2008 crisis, when private credit was a niche funding vehicle for post-crisis leveraged buyouts.

Against that backdrop, the ECB's estimate of EUR 62.5 billion in direct euro-zone bank exposure looks reassuringly small. It represents, on the ECB's own math, 0.2 percent of banking-system assets. The insurer figure of EUR 211 billion and the pension fund figure of EUR 52 billion are larger in absolute terms but small as a share of the relevant balance sheets. On paper, the European financial system is barely exposed to a shock in the $2-3 trillion private credit market. In practice, that conclusion rests entirely on the accuracy of the ECB's inferences, which rest in turn on data that European supervisors have been unable to obtain from the United States.

The consequence, when a supervisor cannot see the data, is not that the exposure disappears. It is that the tail is unknowable. The most honest recent characterisation of the problem came from Portes when he was asked whether the ESRB was in a position to recommend regulation. He said it was.

"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," Portes told Reuters.

That is a European supervisor signalling, in prepared language, that the response to a data gap will be direct regulation. It is the outcome that a rational US Treasury would want to avoid, because European regulation of private credit vehicles run out of US managers is a first-order execution problem for those managers. It is also the outcome that becomes more likely the longer Washington refuses to share exposure data.

What this means for spreads

Direct-lending spreads on senior secured, first-lien middle-market loans have compressed roughly 100 basis points since the 2024 wides, and the aggregate coupon on new direct lending is now inside the syndicated leveraged loan market at comparable ratings. That compression has been driven by two forces: incremental capital moving into the asset class from insurance and pension allocators, and the perception among those allocators that private credit's illiquidity premium is being paid twice, once through spreads and once through structural protections. Neither of those forces prices in a scenario in which European regulators lose patience with Washington and begin unilaterally regulating US-manager vehicles held on European balance sheets.

The way that scenario shows up in spreads is not through a default-rate spike. It is through a sudden repricing of the illiquidity premium as European insurers and pension funds are told, at the level of prudential rule rather than voluntary allocation, to reduce their exposure. The Solvency II review process, which is on the ECB's calendar for the 2027 cycle, is the obvious vehicle for that repricing. So is the Insurance Recovery and Resolution Directive, which entered force last year and gives the European Insurance and Occupational Pensions Authority significantly expanded power to intervene on individual insurer balance sheets. Both of those instruments give European supervisors options that do not require US Treasury cooperation to execute.

Our view

The market is treating private credit's central risk as a credit-quality question. That is the framing that shows up in the sell-side notes about default rates, in the buy-side questions about workout capacity, and in the retail push into semi-liquid business development company vehicles. That framing is not wrong. It is incomplete. The layered risk on top of default probability is a regulatory-arbitrage risk, and the transatlantic breakdown described in the two Reuters pieces last week is the point at which that risk stopped being theoretical.

Positioning for it does not require a directional call on credit quality. It requires an acknowledgement that European allocators to US-domiciled private credit are running an unhedged regulatory tail. The specific expression of that tail is a spread widening driven by supervisory intervention, not by underlying loan performance. In our own book we would prefer, at these spread levels, to hold private credit exposure through European-domiciled managers with European allocator bases, or through the more transparent BDC vehicles that are already inside the US regulatory perimeter, rather than through US-manager continuation funds and semi-liquid vehicles that are the specific object of the ESRB's concern. That is a compositional trade rather than a directional one. The compositional trade is the one that survives the outcome the market is not pricing.

The larger point, and the one worth keeping in view over the next several quarters, is that transatlantic financial regulation is now a subject on which the current US administration and the ECB disagree in public. Two years ago that disagreement was a communications-team problem. Last week, in two Reuters pieces, it became a market structure problem. The correct trade is not to bet against private credit. It is to reprice the risk premium that Europeans should be paying to hold the US-manager version of it, and to notice that the market has not yet done so.

This note reflects the views of Solomon Grey Capital's Private credit and macro desk as of the date of publication and is provided for informational purposes only. It does not constitute investment advice, an offer, or a solicitation to buy or sell any security. Past performance is not indicative of future results.