Matjaž Volk, Analysis and Research department
The views expressed in this paper are solely the responsibility of the author and do not necessarily reflect the views of Banka Slovenije or the Eurosystem. The figures and text herein may only be used or published if the source is cited.
Banks in the euro area are lending more to non-bank financial institutions, or NBFIs. These are financial firms that are not banks, such as investment funds, financial auxiliaries and other financial intermediaries.
This trend has raised an important question: Are banks using more of their balance sheets to lend to financial institutions and less to firms?
Our evidence suggests that they are not. Banks that increase lending to NBFIs do often also show weaker lending growth to firms in aggregate data, but this does not mean that NBFI lending is crowding out credit for the real economy.
When we compare how different banks lend to the same firm at the same time, we do not find evidence that higher NBFI lending reduces credit supply to firms. Additionally, the rise in NBFI lending appears to be linked mainly to banks’ liquidity management.
Banks are lending more to NBFIs.
The share of NBFIs in euro area banks’ loan portfolios has increased since 2022, with the increase becoming more visible after 2024. Over the same period, the share of lending to non-financial corporations continued to decline gradually, while the household share remained broadly stable.
Figure 1
This matters because lending to firms has only recently started to recover. If banks were choosing to lend more to NBFIs instead of firms, this could weaken the recovery in credit for the real economy.
But the timing alone does not prove crowding-out. The decline in the firm lending share started before the recent acceleration in NBFI lending. This means we need to look more closely at what kind of NBFI lending has increased and whether banks have actually reduced credit supply to firms.
But not all lending is the same.
The type of lending is important. A large part of bank lending to NBFIs consists of reverse repos. In a reverse repo, a bank provides cash and receives securities as collateral. These transactions are usually short-term and are closely linked to liquidity and securities financing.
This makes them different from standard loans to firms. A loan to a firm often supports investment, production or working capital. A reverse repo is more often part of short-term balance sheet management.
Reverse repos account for around 70% of outstanding bank lending to NBFIs. This suggests that much of the recent increase in NBFI lending reflects liquidity and collateral management, rather than a long-term shift in banks’ lending priorities.
Figure 2
The key question is whether firms receive less credit.
At first sight, the data point to a negative link. Banks that increase their NBFI lending tend to show weaker growth in lending to firms (see bank level instruments in Figure 3).
But this does not necessarily mean that NBFI lending crowds out credit for the real economy. Aggregate bank-level data cannot fully separate credit supply from credit demand. For example, a bank may lend more to NBFIs at the same time as its corporate clients reduce investment and demand less credit. In that case, lending to firms would fall, but not because the bank decided to cut credit.
To address this, we use granular loan-level data. We compare how different banks lend to the same firm in the same period. This allows us to control for firm-specific credit demand. If a bank that increases NBFI lending also lends less to the same firm than other banks do, this would be evidence of a credit supply effect.
The detailed firm-level data do not show crowding-out.
Once we control for firm demand, the negative relationship largely disappears. Higher NBFI lending is not associated with a statistically significant reduction in firm-level credit supply. This holds both for changes in credit stocks and for the amount of new lending.
The estimated effects are also small. A one percentage point increase in the NBFI lending share is associated with only a very small change in new lending to firms and in outstanding credit stocks. These magnitudes are too small to suggest a material tightening of credit conditions for firms.
Figure 3
Liquidity management offers an additional explanation.
This interpretation is supported by additional evidence on banks’ liquidity management. Banks that increase lending to NBFIs also tend to reduce their liquidity buffers, measured by reserves held at the ECB deposit facility relative to total assets.
This suggests that NBFI lending and liquidity holdings can act as substitutes on bank balance sheets. When banks hold fewer reserves, they may increase short-term collateralised lending to NBFIs. This interpretation fits the fact that reverse repos dominate NBFI exposures.
What this means for policy.
The recent rise in bank lending to NBFIs does not appear to have materially weakened the bank credit channel. Banks have increased NBFI exposures, but we do not find evidence that this has systematically reduced credit supply to firms once firm demand is taken into account.
This is reassuring from a monetary policy perspective. It suggests that the recovery in bank lending to firms is not being held back in a major way by the expansion of NBFI lending.
But the trend still deserves attention. NBFI lending is concentrated in a smaller group of banks, and many NBFI exposures are short-term and linked to securities financing. These links can matter for liquidity conditions and financial stability, especially in periods of market stress.