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Blackstone, Apollo and KKR have agreed to participate in a Bank of England stress test of how the fast-growing private credit market would fare in a major crisis, according to people briefed on the matter.
The BoE is expected to announce this week that it is pressing ahead with plans for a groundbreaking assessment of the resilience of the private credit market, after securing the voluntary co-operation of enough big US private capital groups.
Ares Management and CVC are among the other groups to have agreed to take part next year in the BoE’s so-called “system-wide exploratory scenario”, which will examine how the more lightly-regulated market of non-bank lenders would handle a serious shock.
Regulators around the world have grown more concerned about the build up of risks in the rapidly expanding private credit market after the collapse of US car parts supplier First Brands and subprime auto lender Tricolor exposed areas of potential weakness.
Bank of England governor Andrew Bailey said in October that “alarm bells” were ringing over risky lending in private credit markets as he drew a parallel with practices before the 2008 financial crisis.
The BoE plans to examine how the market for private credit, including leveraged loans, high-yield bonds, asset-backed finance and private equity borrowing, would perform during a crisis and what impact this could have on banks, the wider financial sector and the economy.
The central bank does not regulate many of the largest providers of private credit, so it is relying on them to agree voluntarily to take part in next year’s exercise, which is expected to also include banks, insurers and pension funds.
On Tuesday, the BoE is set to provide an update on its views about the potential risks from private credit in its twice-yearly financial stability report, alongside the results of its latest banking stress tests and an assessment of bank capital requirements.
However, one person familiar with the plan said the BoE was likely to wait until later this week to announce a list of private credit providers that have agreed to take part as well as details of the hypothetical stress scenario they will be testing.
The central bank carried out its first system-wide exploratory scenario last year to examine how non-bank actors, including hedge funds and liability-driven investment funds in pension schemes, would respond in a bond market meltdown.
The IMF warned earlier this year that US and European banks’ $4.5tn exposure to hedge funds, private credit groups and other non-bank financial institutions could amplify any downturn and transmit stress to the wider financial system.
Bailey told the House of Lords financial services regulation committee in October that he was concerned at how private credit borrowing was being repackaged in a way that in the past has obscured the risk of the underlying assets.
“We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis then alarm bells start going off at that point,” he said.
The BoE, Blackstone, Apollo, KKR, Ares and CVC declined to comment.
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