The Bank of England (BoE) is increasing its scrutiny of the private equity and credit industry amid concerns that recent collapses of companies heavily reliant on private finance may signal broader financial instability. Governor Andrew Bailey told lawmakers on Tuesday that the central bank plans to conduct a “stress test” involving private equity firms and other non-bank lenders, drawing parallels to the early stages of the global financial crisis. The move follows the bankruptcies of U.S. car parts maker First Brands and auto dealership Tricolor.
Bailey addressed the House of Lords’ Financial Services Regulation Committee, questioning whether these collapses are isolated incidents or indicative of more systemic issues. He expressed concern about the opacity, leverage, and weak underwriting standards prevalent in private markets. The committee is currently examining the growth of private markets since 2008—referring to finance provided to large businesses outside traditional bank lending or public markets.
Deputy Governor Sarah Breeden indicated that a detailed announcement regarding the “system-wide exploratory scenario” would be made before the end of the year, with the exercise expected to conclude within nine to 12 months. This voluntary exercise will involve banks, insurers, private equity firms, and other non-bank lenders. Bailey also highlighted potential conflicts of interest arising from private finance companies acquiring life insurers, which subsequently invest in assets owned by the private finance companies.
Shares of some U.S. banks have experienced declines in recent weeks due to their exposure to the bankruptcies of First Brands and Tricolor. The Bank of England aims to assess the macro-significance of vulnerabilities within the private equity and credit industry, acknowledging that while the risks are apparent, their overall impact remains uncertain.
