Germany’s financial regulator BaFin has raised concerns about the growing interconnectedness of banks and insurers with private debt funds, warning that it could increase the risk of contagion and threaten financial stability.
The federal financial supervisory authority said European supervisors must closely monitor links between traditional lenders and non-bank financial intermediaries operating through private debt structures.
Mark Branson, president of BaFin, said lending by banks to private debt funds heightens the risk of spillover effects within the German financial system.
“Financial companies here in Germany are intertwined with foreign private debt vehicles,” Branson said. “They provide the funds with capital, which is then used to leverage investments. This poses risks outside the traditionally regulated banking sector.”
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Lending by German private debt funds accounts for just 0.2 per cent of the total lending volume of German banks. However, BaFin warned that stability risks could arise in particular from international contagion effects.
If banks provide additional capital to private debt funds, thereby increasing leverage, this could raise default risks for both lenders and investors. The regulator added that the interconnections are complex and often lack transparency.
In addition to providing loan financing to private debt structures, banks may also acquire ownership stakes in them or hold claims on the same companies financed by private debt providers. This could amplify contagion effects across the financial system in the event of payment defaults.
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BaFin stated that it will closely monitor credit risks of banks and insurers in 2026. This is against a backdrop of weak German economic conditions, with the number of company insolvencies is rising, and with it the proportion of non-performing loans on German banks’ balance sheets.
In August 2025, the number of regular insolvency filings in Germany reached 1,979, up 12.2 per cent year-on-year.
“The risk is increasing that financial stability will be put to the test. The potential for sudden market and price corrections is high,” added Branson.
