ECB Stress Test: Private Credit Shock Would Hit Insurers Most

The European Central Bank published an illustrative stress test of private credit in its May 2026 Financial Stability Review. The exercise asked what would happen to euro area banks, insurers and pension funds if the private credit market suffered a severe shock. The finding was that insurers and pension funds, not banks, would bear most of the losses, although the ECB did not judge the risk to be systemic today. This article summarises the ECB's special feature and a Bloomberg report syndicated by Insurance Journal, explains the main terms, and notes what the public text does and does not say. It is a summary of public information, not investment or legal advice.

What private credit is

Private credit is lending by non-bank investment funds directly to companies, usually outside public bond markets and often to firms too small or leveraged for traditional bank loans. The loans are not traded daily, so they are valued by the lender and are harder to sell in a hurry. Insurers and pension funds have increased their allocations because the loans can pay more than public bonds, a return that investors call an illiquidity premium. The ECB's concern is how losses in this market could connect with the rest of the financial system.

Bloomberg's report on the ECB extract said private credit has been under pressure from concerns about overspending on artificial intelligence, the effect of AI on the software industry, and doubts about lending standards.

How the stress test worked

The ECB described the exercise as illustrative, meaning it shows how shocks could spread and is not a forecast. It had three stages. In the first, direct private credit losses were simulated with a 10% default rate and a loss given default of 50%, which means that half of the value of a defaulted loan is lost. In the second, losses on loans to software companies held in leveraged loans and high-yield bonds were added, with a default rate of 30% and a loss given default of 80%. In the third, second-round market revaluations followed, with a 30% fall in equity prices and a 25% change in the valuation of high-yield bonds, after outflows from high-yield bond funds and open-ended private credit funds. Bank losses took account of the seniority of their lending to private credit funds, and equity losses used the methodology of the European Banking Authority's 2025 stress test.

The results

The ECB found that banks' losses stayed contained at every stage, and did not exceed 1.3% of their total equity. It explained this by the seniority of the banks' loans to private credit funds and by the small size of the exposures. Insurers faced the largest impact in absolute terms, because their exposures are larger and less senior and because their equity holdings drive much of the loss once market revaluations are included. Pension funds were hit hardest relative to total assets, again mainly because of their equity holdings in the third stage. The third stage produced by far the largest impact of the three.

The public text does not give percentage loss figures for insurers or pension funds. Some summaries elsewhere have quoted specific numbers, but the ECB document and the Bloomberg report reviewed here do not, so this article does not repeat them.

How big the exposures are

The ECB estimated that euro area insurers held about EUR 211 billion of private credit in 2025, which is roughly 2.3% of their total assets. Pension funds held about EUR 52 billion, or 1.4% of total assets. Banks held about EUR 62.5 billion worldwide, equal to 0.2% of total assets and 2.5% of total equity. Bloomberg reported that private credit funds based in the euro area manage about EUR 100 billion. For banks and insurers, the exposures are highly concentrated in a small number of large institutions, which means that averages can hide larger risks at individual firms.

The ECB's conclusions

The central bank's conclusion was measured. Direct exposures are limited, so private credit in isolation is unlikely to threaten euro area financial stability at present. Insurers and pension funds could face more material revaluation losses if stress spread to leveraged loans, high-yield bonds and equities, but they are generally well placed to absorb such losses because they invest for long periods and their liabilities are not subject to immediate run risk. In other words, a life insurer's policyholders cannot all withdraw their money in a week in the way that fund investors sometimes can.

Even so, the ECB said the market should be monitored closely because of weakening credit quality, the possible expansion of private credit into products aimed at retail investors, and a potential role in financing artificial intelligence. It also pointed to data gaps and opacity that limit a full assessment and called for better data and a harmonised global definition of private credit.

What it means for policyholders and savers

Most policyholders will not notice any change from a report like this. The relevance is indirect: life insurers and pension funds hold private credit to support the returns they promise, and supervisors want them to value the assets prudently, hold enough capital and understand how exposures are linked. People who hold a pension or an annuity can ask their provider how much it invests in private assets and how those assets are valued, although the answers will vary by country and product.

Limits of the exercise

The ECB stresses that the numbers are illustrative. The stress parameters, such as a 30% default rate on software loans, are severe by design and do not predict what will happen. The result also depends on the assumption that markets reprice sharply in stage three, which is a hypothetical chain of events.

What to watch next

Watch for further ECB and national supervisory work on private credit, for data initiatives that improve visibility, and for company disclosures from large insurers about their private asset holdings. The ECB publishes its Financial Stability Review twice a year on its website. This article summarises public reporting and is not financial advice.