The Bank of England has discovered that some banks are unable to accurately assess their exposure to private equity, highlighting concerns that the $8 trillion industry could pose a risk to the broader financial system.
Rebecca Jackson, a regulator at the Bank of England, emphasised the importance of lenders routinely conducting stress tests on their exposure. However, she noted that "hardly any banks do it well."
“Many banks are unable to uniquely identify and systematically aggregate or measure their combined credit and counterparty risk exposures to the private equity sector,” she said in a letter to lenders’ chief risk officers.
Jackson, a BoE executive director, added in a speech that “very few firms carry out routine, bespoke and comprehensive stress testing for aggregate [private equity firm] related exposures”. She compared the banking industry’s lack of knowledge over their exposure to private equity sponsors to their problems dealing with Archegos Capital, the collapse of which in March 2021 cost six banks more than $10bn and contributed to the downfall of Credit Suisse.
Jackson’s remarks echo previous warnings that the BoE has issued about the impact on the broader economy of a private equity bubble. In the last decade, banks have evolved into a one-stop destination for buyout firms, exerting a growing influence on the global economy.
They offer financing for deals and organise loan and bond offerings for portfolio companies owned by private equity groups to refinance debt, resulting in lucrative fee streams.
