The Bank of England has initiated a significant new exercise to probe the resilience of the rapidly growing private credit and equity sector, amid mounting concerns over its potential threat to the wider UK economy.
Why the Bank of England is Acting Now
Governor Andrew Bailey stated recently that the central bank must take concerns over recent high-profile failures in the sector "very seriously." This move comes after the collapses of US firms First Brands and Tricolor in October, which heightened investor anxiety. The Bank has decided to act because these private market firms have never been tested against the backdrop of a severe global downturn.
The scale of the market under scrutiny is vast. Over the past ten years, total assets held in private credit and equity funds have ballooned from approximately $3 trillion (£2.25tn) to a staggering $11 trillion (£8.23tn). In the UK, this form of financing now plays a crucial role, supporting around two million jobs by providing capital to companies outside the traditional banking system.
Understanding the Market and Its Risks
Private credit involves businesses securing loans directly from private funds rather than high-street banks. Private equity typically sees firms receive financing in exchange for a stake in the business. While valuable for innovation and growth, this sector operates with far less regulatory oversight than mainstream banking, a fact that has raised alarm bells in recent months.
Sarah Breeden, the Bank’s Deputy Governor for Financial Stability, acknowledged the sector's importance, saying: "Private equity and private credit play an increasingly valuable role in helping UK companies to innovate, invest and grow." She added, "To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress."
The Stress Test Process and Participants
The Bank confirmed that a range of firms, including "major global players," have agreed to participate in the landmark review. Investment titans such as Blackstone, Apollo, and KKR are reported to be among those signed up. The core objective is to determine whether vulnerabilities in this opaque market could pose a genuine risk to the UK's overall financial stability.
The bulk of the testing is scheduled to take place throughout 2026. The Bank of England expects to provide an interim update on its findings during that year, before publishing a comprehensive final report in early 2027.
