Finance

EU Stress Test: detailed analysis of non-banking companies in sight

The European Union is preparing to conduct the first stress test to assess the financial stability of non-banks in 2027

27 May 2025

2' min read

EU regulators are planning, for early 2027, the first stress test to identify vulnerabilities in the financial system outside banks, reflecting fears about the rapid growth of less regulated groups such as hedge funds and private equity. The Financial Times sources from which the article was translated are two people involved in the preparation of the plan.

The European authorities' plans to examine the impact on the financial system of a potential market crisis, which would also include pension funds and insurers, follow the pattern adopted by the Bank of England last year. The move could raise serious concerns among hedge funds, private credit groups and money market funds that they could be subject to more scrutiny and restrictions from European regulators in the future.

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After the financial crisis of 2008, lending shifted from the balance sheets of banks to other companies that behave like traditional lenders, but with lighter regulation. According to the European Central Bank, non-banks will account for about a quarter of the total stock of loans in the Eurozone, amounting to EUR 19 billion at the end of 2023, and 'more and more loans are being provided by insurance companies and pension funds'. Supervisors are increasingly concerned about the opacity and potential risks that these companies might present, as well as their links to the financial market.

The EU's objective is to examine how a crisis would propagate between different parts of the financial system and whether this would amplify the shock rather than absorb it.

The discussions involved the European Banking Authority, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the ECB, as well as the European Commission and the European Systemic Risk Board. The regulators and the committee all declined to comment.

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The EU Commission said on 23 May 2025 that it would postpone the implementation of stricter capital requirements for banks' securities trading activities by one year until the beginning of 2027.

The delay will allow Brussels to wait for clarification on whether the US intends to proceed with the rules agreed by global regulators within the Basel Committee on Banking Supervision.

The BoE involved more than 50 institutions in the City of London in its so-called system-wide exploratory scenario - which included the theoretical default of a hedge fund - to model how a period of stress would affect non-banks.

City firms were relieved when the BoE declared that resilience was 'relatively high' in liability-based investment funds in pension plans, which had caused a crisis in the gold markets two years earlier.