Implications from Bank of England private markets exploratory scenario
The Bank of England’s (BoE’s) second System-Wide Exploratory Scenario (SWES) tests how stress in private equity (PE) and private credit (PC) could transmit through banks and non-banks, amplifying shocks via leverage, valuation opacity, ratings reliance, and data gaps, and ultimately constraining financing to the UK corporate sector. The findings will be directly relevant to US banks given growing committed liquidity to PC vehicles and rising business development company leverage.
This article examines how stress in PE and PC can quickly spread through both banks and non-banks, amplifying financial shocks and straining liquidity across the interconnected financial system. The analysis highlights the need for a more holistic approach to risk management, emphasizing that traditional credit risk tools alone may not be sufficient to capture the systemic and liquidity-related challenges posed by the evolving private credit landscape. The recommendations are focused on strengthening controls, stress testing, and cross-jurisdiction alignment.
