How cross-border flows via non-bank financial institutions constrain financing for euro area firms

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How cross-border flows via non-bank financial institutions constrain financing for euro area firms

15 May 2026

By Dorian Henricot, Caterina Mendicino, Luis Molestina Vivar, Wouter Wakker, and Jakob Wenzl

Two trends have diverted financing away from euro area firms in recent years. First, euro area NBFIs have shifted their portfolios towards foreign assets – particularly US equities. Second, banks have channelled more lending to NBFIs outside the euro area. Together, these cross-border flows via NBFIs contributed to a sluggish recovery in firms' external financing over recent years.

NBFIs are reshuffling their portfolios at the expense of euro area firms

NBFIs, such as investment funds and insurers, play a crucial role in financing firms through both equity and bond markets. In recent years, euro area NBFI securities holdings have grown substantially, rising from around €11 trillion in early 2018 to €17 trillion by the end of 2025 (Chart 1, panel a). Investment funds account for roughly 60% of the total.^[1] Strikingly, however, the composition of these portfolios has been shifting away from European assets more recently.^[2]

Most of this reflects the exceptional performance of US stocks – especially in the tech sector. This has systematically raised their value relative to European holdings. But the changing composition of NBFIs’ portfolios is not just a valuation story: NBFIs, particularly investment funds, do not just hold US equities, they have also been buying them.

Since late 2023 euro area NBFIs have increased their allocation to US corporate equities by around 2.7 percentage points through net purchases. At the same time, they have reduced their allocation to euro area corporate equities by about 1.5 percentage points (Chart 1, panel b, left). The reallocation has come, to a lesser extent, at the expense of euro area government bonds and bank equities.

Chart 1

Developments in NBFI equity and debt portfolios

a) NBFI debt and equity holdings, by issuer sector and geography	b) NBFI holding of firm equity
EUR trillion	percentage points

These developments clearly matter for the financing of euro area firms. Research by Henricot, Mendicino, Molestina Vivar and Pelizzon finds that increases in the share of US corporate equities in NBFI portfolios are associated with declines in the share of euro area equities. An increase of 1 percentage point in the share of US equities in NBFI portfolios is associated with a 0.3 percentage point reduction in the share of euro area corporate equities (Chart 2, panel b, right).^[3] While the substitution effect is not one-for-one, it is meaningful and material. And it suggests that the growing appetite for US assets may be squeezing out equity financing for European businesses.

Banks are lending more to non-bank financial institutions and less to firms

A similar dynamic is playing out on the banking side. Bank exposures to NBFIs have grown steadily in recent years, reaching around 11% of total assets by the end of 2025 (Chart 1, panel a).^[4] Most of this takes the form of direct loans predominantly to investment funds and other financial institutions – mainly short-term collateralised loans (reverse repos). A substantial share of these loans is directed to entities operating outside the euro area.^[5]

Chart 2

Bank loans to non-banks and firms

a) Bank asset-side exposure to NBFIs	b) Bank loans to non-banks and firms
percentages of total assets	LHS: percentage points; RHS: coefficient

It is especially notable that this trend has come at the expense of lending to firms (Chart 1, panel b).^[6] Research by Li, Ma, Mendicino and Supera shows that when the bank a firm borrows from increases its NBFI lending by 1 percentage point, that firm's access to bank credit falls by 0.55 percentage points on average (Chart 1, panel b). Crucially, firms cannot easily make up the shortfall by turning to other banks or NBFIs for alternative funding.^[7]

In the current geopolitically uncertain environment^[8], reverse repos to NBFIs are an attractive option for banks, particularly those with weaker capital positions. It is therefore unsurprising that this expansion aligns with the risk-averse attitudes banks have reported in recent surveys.^[9]

Conclusion

The two trends described in this post point in the same direction: cross-border flows via NBFIs weigh on the recovery of firm financing over the ECB's easing cycle.

When euro area investment funds reshuffle their portfolios in favour of US equities, European firms find it harder to raise capital in markets. When banks shift towards foreign NBFIs over domestic borrowing firms, European firms find it harder to secure loans. The result is a sluggish financing recovery that is lagging behind policy rates.^[10] This is a reminder that as NBFIs grow in global importance their cross-border behaviour deserves close and sustained attention from policymakers.

The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.

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1. See also Pelizzon et al. (2025), “Growth of non-bank financial intermediaries, financial stability, and monetary policy”, Sintra Forum.

2. For an assessment of the geographical portfolio allocation of investment funds, see Lambert, C., Molestina Vivar, L., and Wedow, M. (2024), “Is Home Bias Biased? New Evidence from the Investment Fund Sector”, ECB Working Paper Series, No. 2924.

3. For a more detailed assessment of the drivers of the reallocation of NBFI portfolios towards US equities, including the role of exchange-traded funds, and its implications for euro area firm financing, see Henricot, D., Mendicino, C., Molestina Vivar, L., and Pelizzon, L. (2026), “NBFIs’ portfolio reallocations and implications for euro area firm financing”, forthcoming.

4. While NBFIs remain net providers of funds to euro area banks, accounting for at least 14% of euro area bank liabilities, bank lending to NBFIs has grown faster than the funding from NBFIs to banks. See the ECB’s Financial Stability Review for more on this.

5. Around 80% of the increase in lending to NBFIs reflects loans to counterparties outside the euro area to foreign securities dealers and Cayman Islands-based hedge funds. For a fund-level assessment of AIMFD-regulated hedge funds, see Bouveret, A., et al. (2025), “Containing risks from leverage in alternative investment funds”, Occasional Paper Series, ESRB.

6. For a more detailed assessment of the drivers of the reallocation of bank credit towards NBFIs see Li, J., Ma, Y., Mendicino, C. and Supera, D. (2025), “Bank to Non-Bank Lending and the Reallocation of Credit”, Working Paper Series, No 3220, ECB.

7. The recent expansion of private credit does also not materially offset this trend. Although private credit volumes in the euro area have grown rapidly since 2024, the overall stock remains small relative to bank lending and is overshadowed by the much larger market in the United States.

8. For the impact of uncertainty on credit to firms see Allayioti, A., et al. (2025), “More uncertainty, less lending: how US policy affects firm financing in Europe”, The ECB Blog, ECB, 2 October.

9. The ECB’s euro area bank lending survey for the fourth quarter of 2025 points to a deterioration in banks’ risk perceptions and a decline in their risk tolerance.

10. For an assessment of the recent credit recovery in the euro area see Di Casola, P., Mendicino, C., Nicoletti G., and Skoblar, A., (2026) “Mind the gap: credit dynamics in the euro area”, The ECB Blog, ECB, 26 February.

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