Bank of England: Private Markets Resilience Assessment for UK Economic Stability The Bank of England has launched a comprehensive initiative aimed at evaluating the resilience of private markets in bolstering the stability of the UK economy. This strategic exercise seeks to identify strengths and vulnerabilities within private market sectors, ensuring they effectively contribute to overall economic health and sustainability. Through rigorous analysis and stakeholder engagement, the Bank aims...
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The Bank of England has initiated its second System-Wide Exploratory Scenario (SWES) exercise. This initiative examines the functioning of the private markets ecosystem during economic stress, focusing on implications for the UK’s financial stability and the real economy.
The private markets sector comprises various long-term financing solutions, primarily through private equity (PE) and private credit (PC).
Private market funds globally manage approximately $16 trillion, with PE and PC growing from about $3 trillion to nearly $11 trillion in the past decade. This growth highlights the essential role these markets play in funding UK enterprises, significantly impacting corporate debt and employment.
The importance of private markets in the UK
The rise in private market activity has created diverse avenues for long-term capital, enhancing economic progress. However, the resilience of these markets under severe economic conditions remains under-explored. The Financial Policy Committee (FPC) of the Bank has expressed concerns regarding interdependencies with other financial entities, such as banks and insurers, along with vulnerabilities linked to leverage, valuation, and reliance on credit ratings.
Exploring systemic risks
The first SWES primarily addressed risks in gilt, gilt repo, and the sterling corporate bond markets. This latest exercise aims to identify critical data deficiencies while exploring risks and dynamics associated with private market financing. A key objective is understanding how banks and non-banks participating in private markets would respond to a potential global downturn and how their interactions could intensify stress within the financial system, ultimately threatening the stability of the UK economy.
According to Sarah Breeden, Deputy Governor for Financial Stability, private equity and private credit are increasingly crucial for driving innovation, investment, and growth among UK businesses. A comprehensive understanding of risk propagation during stress scenarios is essential to ensure these benefits continue. This exercise represents a unique collaboration with firms to achieve that understanding.
Methodology of the exercise
The SWES will occur in two phases, allowing participants to engage with system-wide interactions and amplification effects. This process includes updating firms on peer behaviors and assessing the consequences of those actions, alongside examining key sensitivities. Participants will include leading firms in private markets, such as traditional and alternative asset managers, major banks extending credit to private market funds, and institutional investors who are the primary capital sources for both private and related public markets.
Collaboration and implications
The exercise will be conducted in close partnership with the involved firms. A significant number of alternative asset managers, including prominent global entities, have committed to participation. Collectively, these firms represent roughly one-third of the UK’s leveraged buyout activities and about half of the private credit engagement in the corporate sector, reflecting their considerable impact on employment in PE-backed companies.
Conducted under the auspices of the FPC and the Prudential Regulation Committee (PRC), this exploratory exercise will also receive support from relevant regulatory bodies, including the Prudential Regulation Authority and the Financial Conduct Authority. The Bank is committed to sharing findings with international regulatory organizations, such as the Financial Stability Board, to enhance global understanding of developments in private markets.
Future insights and reporting
This exercise is not designed to test the resilience of individual firms; rather, it focuses on the overall robustness of private market financing systems in relation to the UK corporate sector. Most of the exercise will conclude by 2026, with a comprehensive report scheduled for release in early 2027. This report will summarize system-wide findings, sector-specific insights, and potential implications for corporate financing in the UK.
As the Bank of England advances with this analysis, it will provide updates throughout 2026, offering valuable insights into the interplay between private market dynamics and financial stability in the UK.
