The International Monetary Fund (IMF) has warned that banks in the US and Europe hold $4.5tn in exposures to hedge funds, private credit, and other non-bank financial institutions, raising concerns about systemic risk, according to a report by the Financial Times.
According to the IMF’s latest Global Financial Stability Report, these non-bank exposures now average around 9% of total bank loan books, with some lenders holding positions exceeding their tier-one capital. A small number of US and Eurozone banks have exposures more than five times their capital, highlighting potential vulnerabilities.
IMF officials said the growth of financing activity outside traditional banking is increasing risk in the system. Private credit loans often offer higher returns on equity due to lower capital requirements, while recent efforts by private funds to provide retail access may amplify redemption pressures in a downturn.
The IMF noted that the financial system remained resilient during the short-lived market sell-off in April, but stressed that surging equity markets, driven by optimism around artificial intelligence, have increased potential risks. Equity markets are currently estimated to be about 10% overvalued.
Hedge funds have pushed back against calls for tighter scrutiny, arguing they employ less leverage than banks and do not benefit from taxpayer-backed guarantees.
