Lord Hollick stressed that ‘the Treasury itself needs to be curious about this and needs to be actively engaged’ - Roger Harris Photography Treasury ministers have come under fire from an influential group of peers for failing to grasp the risks of Wall Street’s shadow banking bubble. On Thursday, the House of Lords’ financial services regulation committee heavily criticised the Government for having “demonstrated a limited grasp” of the risks posed to the financial system from the private markets boom. ...

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].

Core Viewpoint - BlackRock is facing a $500 million loss due to alleged fraud in its shadow banking business, raising concerns about the stability of the shadow banking industry [1][2][6]. Group 1: BlackRock and HPS Investment Partners - BlackRock's private credit investment arm, HPS Investment Partners, is pursuing legal action to recover loans made to a US telecom firm accused of faking customer payments [1][2]. - HPS provided loans to Bankim Brahmbhatt, owner of Broadband Telecom and Bridgevoice, under the condition that he pledged customer receivables as collateral [3][5]. - Allegations include that Brahmbhatt forged contracts, emails, and invoices to misrepresent the legitimacy of the receivables [3][6]. Group 2: Industry Concerns - The incident has intensified worries about the opaque nature of the shadow banking industry, which has attracted significant investments but is now facing potential crises [2][6]. - The International Monetary Fund (IMF) has raised alarms regarding the unregulated private credit market, while JP Morgan's CEO has warned of hidden risks within the financial system [7][6]. Group 3: Legal and Financial Implications - A lawsuit was filed by Alter Domus, a financial services firm acting for HPS, in August, and several companies linked to Brahmbhatt have filed for Chapter 11 bankruptcy protection [5][6]. - The recent failures of companies like First Brands and Tricolor have caused market instability, highlighting the risks associated with bad loans in the financial sector [6].

Core Viewpoint - The $3 trillion shadow banking industry is exhibiting "bubble-like characteristics" that could potentially lead to a global financial shock, according to Fitch Ratings [1]. Group 1: Market Concerns - The recent $12 billion collapse of First Brands and warnings from two regional US banks about bad loans have raised concerns about underlying issues in the private credit market [2]. - The private credit market has grown by 50% in recent years, with the IMF estimating that banks globally have approximately $4.5 trillion in exposure to private credit players [3]. Group 2: Risk Factors - Fitch notes that private credit is transitioning from a niche product to a significant asset class, increasing in both scale and complexity, which could expose the financial system to unexpected risks [4][5]. - The involvement of individual investors alongside major banks and fund managers, along with increased leverage among borrowers, are contributing to the bubble-like trends [5]. - "Spread compression," where investors accept lower yields on risky investments, may indicate weaker lending standards [6]. Group 3: Current Market Dynamics - Despite the emerging risks, Fitch has not observed "classic bubble signs," as investors are still cautious in pricing high-risk credit [7]. - Banks' exposure to risky borrowers is primarily indirect, and they possess limited liquidity risk, allowing them to withdraw funds from private credit vehicles if necessary [7]. Group 4: Economic Outlook - Signs of an economic slowdown in the US could lead to increased defaults among heavily indebted borrowers, particularly in sectors like auto parts and used cars [8].

Group 1: Market Reactions and Economic Indicators - The FTSE 100 index increased by 0.25% as markets closed, driven by optimism surrounding potential trade talks between the US and China [1] - British stocks saw a boost as investors returned to the London markets following fears of renewed trade tensions, which had previously led to declines [7] - The price of gold experienced its largest drop in four years, falling by 3.8%, as hopes for progress in US-China trade talks diminished its appeal as a safe haven [10][11] Group 2: Private Credit Market Concerns - The Bank of England is considering a "system-wide exploratory scenario" stress test to assess the stability of the private credit market, often referred to as shadow banking, amid rising concerns [2][32] - Andrew Bailey, Governor of the Bank of England, expressed serious concerns that recent high-profile bankruptcies in the US could indicate broader risks within the private credit sector [3][13] - The private credit market, valued at $3 trillion, is drawing parallels to the financial engineering practices that contributed to the 2008 financial crisis [6][5] Group 3: Fiscal Challenges and Government Borrowing - The UK government borrowed £20.2 billion in September, marking the highest borrowing for that month since the pandemic, with total public sector spending rising significantly [53][54] - Economists warn that the Chancellor may need to implement tax increases of around £25 billion to balance the books, as current fiscal headroom has been nearly eliminated [15][23] - The Office for Budget Responsibility noted that while tax receipts have improved, overall borrowing remains higher than forecast due to local authority overspending and bankruptcies [27][28]

Core Insights - Wall Street investors are selling shares in major money managers due to concerns over their $3 trillion push into lending, with shares in Apollo, Blackstone, KKR, and Ares dropping over 10% in the last month despite a rising US stock market [1][2] Group 1: Market Performance - The S&P 500 has increased by 3.4% during the same period, with a year-to-date gain of over 15% driven by excitement around artificial intelligence [2] - The money managers affected were initially private equity investors but have expanded into private credit, contributing to a $3 trillion private credit market that has grown by $1 trillion in the past five years [3] Group 2: Risks in Lending - Concerns are rising about borrowers' ability to repay private loans, especially in light of potential stock market crashes linked to over-inflated tech stocks [4] - The collapse of First Brands, a US car parts supplier, has intensified fears, with reports of $2.3 billion "vanishing" from a private lender [5] - JP Morgan has indicated that despite low default rates, there are signs of stress among borrowers, suggesting potential widespread issues if economic conditions worsen [5][6] Group 3: Industry Dynamics - The private credit sector has seen significant involvement from pension and insurance funds, as well as banks, indicating its extensive reach [6][7] - Apollo has announced plans to invest up to $4.5 billion in projects with EDF, including the Hinkley Point C nuclear power station, and aims to lend $275 billion annually over the next five years [7]