Bank of England hunts for ‘cockroaches’ in $11tn shadow banking market

Core Viewpoint - The Bank of England is conducting a stress test on the private equity sector to assess its resilience in a hypothetical financial crisis, highlighting concerns over the opacity and risks associated with the $11 trillion shadow banking market [1][2][3]. Group 1: Stress Test Overview - Major financial groups such as KKR, Blackstone, Apollo, and Goldman Sachs Asset Management are participating in the stress test [2]. - The system-wide exploratory exercise (SWES) will be conducted next year, with full conclusions expected by 2027 [3]. Group 2: Market Growth and Employment Impact - The private equity and private credit sectors have expanded from $3 trillion to $11 trillion in assets over the past decade [4]. - In the UK, 10% of private sector workers are employed by private equity-backed companies, which account for 15% of corporate debt and a significant portion of riskier lending [4]. Group 3: Recent Market Concerns - The collapse of American companies First Brands and Tricolor has raised alarms about potential risks in the private credit market, which heavily relies on lending to companies rather than banks [5]. - A downturn in private markets could adversely affect banks that lend to private equity-backed firms, potentially undermining financial stability and economic growth [5]. Group 4: Employment and Economic Risks - Private equity-owned companies currently employ approximately two million people in the UK, indicating a significant impact on employment [6]. - A rapid contraction of companies backed by private equity could lead to increased unemployment and negatively affect related markets, such as housing and mortgage lending [6]. Group 5: Industry Characteristics and Risks - The rapid growth of private credit is characterized by its opacity and illiquidity, which may lead to adverse outcomes [7].