BoE says private credit stress test could counter market pessimism

The Bank of England believes its examination of private credit could help challenge some of the increasingly negative assumptions surrounding the asset class, even as regulators continue to assess the risks posed by its rapid expansion, according to a report by CityWire.

The central bank is conducting a system-wide exploratory scenario (SWES) to examine how private credit and other parts of the financial system would respond to an extreme market shock. Around 50 firms have been asked to participate, including several major private credit managers.

Asset managers have until Friday to submit their responses, with participants describing the exercise as a significant undertaking. The Bank of England plans to publish a report based on the findings next year.

Speaking at the UK Private Capital Summit in London, Nathanaël Benjamin, the Bank of England’s executive director for financial stability strategy and risk, said the exercise was necessary given how dramatically private credit has expanded since the low-interest-rate era.

The Bank of England is focusing on four principal areas of potential vulnerability: excessive leverage, uncertainty around valuations, mismatches between the liquidity offered to investors and the liquidity of underlying assets, and the links between private credit and the wider financial system.

The exercise comes as regulators and institutional investors increasingly scrutinise private credit following years of rapid growth. The asset class has become a major source of financing for private companies, while private credit managers have expanded into a broader range of lending strategies and investment structures.