House of Lords – Financial Services Regulation Committee Inquiry into the growth of private markets in the UK following reforms introduced after 2008 - Response to the invitation to give evidence by Professors Marco Lamandini and David Ramos Muñoz

The rise of private markets, including private credit, and of the role of non-bank financial intermediation and of the wide range of intermediaries in-cluded herein (either one, hereinafter “NBFI”) in financial markets is a global phenomenon, which has elicited interest, while some episodes have also raised alarms. However, the phenomenon varies across markets and jurisdictions, and notably the US differs from the UK and the Eurozone. NBFIs can be a source of risk due to (i) their vulnerabilities, e.g., liquidity mismatches in open-ended funds, increased leverage in e.g. hedge funds, and stale valuations across the market, (ii) their interconnectedness with banks, with Eurozone banks more exposed on their liability side (NBFIs are major sources of financing) while UK banks are even more exposed on their asset side (being major sources of NBFIs financing), an interconnectedness concentrated on a few systemic banks; (iii) the opacity of the market and its linkages. Gathering better, more granular information about NBFIs investment positions in credit markets, and interconnectedness with banks can help reap the benefits of funding diversification and understand the risks. To mit-igate such risks authorities should have at their disposal macroprudential tools to limit liquidity mismatches, leverage, and impose stricter valuation requirements.