(Bloomberg) -- Direct lenders and buyout firms may grow to such an extent that they have the potential to impact the stability of the wider financial system, according to a European watchdog. 

“If the rapid growth in private finance observed in recent years were to continue, the sector could become systemically relevant,” the European Systemic Risk Board said in a report on Thursday in Frankfurt. “More transparency is needed to better understand how private finance could create and/or transmit risks to financial stability.”

Private credit is one of the fastest-growing corners of finance as firms that stepped in to fill a gap left by banks increasingly compete with traditional lenders. Authorities from around the world are now debating how and whether to regulate direct lenders and other investors that used to be referred to as shadow banking.

While private finance facilitates diversification and risk-sharing across the financial system, there’s a risk that it contribute to “over-indebtedness and financial imbalances,” the ESRB said. 

“It is important to enable adequate information, including on the volume and quality of lending by non-banks, as well as more detailed data on interlinkages with the banking sector and institutional investors,” the watchdog wrote in the report.

 

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