The Bank of England is conducting an extensive exploratory exercise to evaluate how private equity and private credit markets could weather a severe global downturn, highlighting rising concerns over systemic risks from expanding private markets in the UK economy.
The Bank of England has launched a wide-ranging system-wide exploratory scenario to probe how private equity and private credit markets would withstand a severe global downturn, signalling growing official concern about risks flowing from rapidly expanding private markets into the wider UK financial system and real economy.
According to the original report from the Bank, the exercise will focus on private markets’ interactions with banks, insurers and leveraged finance markets, and on vulnerabilities linked to leverage, valuation complexity and reliance on credit ratings. The Bank notes that global private market assets stand at roughly $16 trillion, with private equity and private credit expanding from about $3 trillion to $11 trillion over the past decade. In the UK, private-equity sponsored firms account for up to 15% of corporate debt and roughly 10% of private-sector employment , just over two million jobs , underlining the potential real‑economy consequences of systemic stress.
Deputy governor for financial stability Sarah Breeden said: “Private equity and private credit play an increasingly valuable role in helping UK companies to innovate, invest and grow. To keep delivering those benefits, we need a robust understanding of how risks might flow through the financial system in a stress. This exercise provides a unique opportunity to work collaboratively with firms to build that system‑wide understanding together.” The Bank emphasised the SWES is exploratory and system‑wide , not a test of the resilience of individual firms , and that published material will not identify participants.
The two‑round design is intended to capture interaction and amplification effects, allowing firms to update assumptions on other participants’ behaviour and for the authorities to test key sensitivities. Participants will span traditional and alternative asset managers, large banks that lend to private-market vehicles and private‑equity sponsored corporates, and institutional investors that provide primary capital to these markets. The Bank said participating asset managers in aggregate account for around one third of UK private‑equity leveraged buyout activity and about half of UK and global private‑credit lending to corporates.
Industry and market developments cited by the Bank and other official reports help explain the timing and scope of the exercise. The Bank’s December 2025 Financial Stability Report flagged elevated valuations in AI‑linked firms, rising risk‑taking in corporate lending and concentrated leveraged positions in gilt repo markets as material concerns; it warned these factors could amplify losses if asset prices correct. Reuters reporting notes the exercise will exclude commercial real estate and venture capital, and that major global private finance firms have agreed to participate voluntarily, reflecting the Bank’s limited direct regulatory reach over these entities.
The BoE intends to complete most of the exercise during 2026 and publish a final, aggregate report in early 2027, setting out system‑level findings, sector‑specific observations where relevant, and any implications for the Bank’s assessment of risks to UK financial stability and corporate financing. The Bank said it will work closely with the Prudential Regulation Authority, the Financial Conduct Authority and The Pensions Regulator, and will share findings with international bodies such as the Financial Stability Board to inform global understanding of private market vulnerabilities.
The move follows earlier BoE stress work on gilts, repo and sterling corporate bond markets and complements wider policy steps the Bank has taken to strengthen market liquidity backstops and probe central counterparties’ resilience. Industry participants and international regulators will be watching for any conclusions that could prompt changes to oversight, disclosure or liquidity arrangements for non‑bank finance , areas the Bank has already flagged as carrying opacity and potential for unchecked risk‑taking.
- https://www.scottishfinancialnews.com/articles/boe-launches-major-stress-test-into-private-equity-and-credit-markets – Please view link – unable to able to access data
- https://www.reuters.com/sustainability/boards-policy-regulation/bank-england-launches-stress-test-private-equity-private-credit-industries-2025-12-04/ – The Bank of England (BoE) has initiated a comprehensive stress test targeting the $16 trillion global private equity and private credit sectors to assess their resilience to major financial shocks. This initiative aims to understand systemic risks and their potential impact on the broader UK economy. Rather than identifying vulnerabilities of individual firms, the test will evaluate broader financial flows, focusing on large UK businesses while excluding commercial real estate and venture capital. Key players in the private finance industry—such as Apollo, Bain Capital, Blackstone, and Goldman Sachs Asset Management—are participating. These firms represent a significant share of the UK’s private equity-backed workforce and investment activity. Participation is voluntary, as the BoE does not regulate these entities directly. The test, which will produce a final report by early 2027, will be conducted in two stages to evaluate how firms might react to systemic market responses. BoE officials highlighted concerns about market opacity, complex structures, and unchecked risk-taking, referencing recent U.S. corporate collapses as potential early warning signs. Findings will be shared with international regulators, aligning with global financial stability goals under the Financial Stability Board chaired by BoE Governor Andrew Bailey.
- https://www.reuters.com/sustainability/boards-policy-regulation/bank-england-sees-risks-ai-private-credit-gilt-repo-half-yearly-update-2025-12-02/ – In its December 2025 Financial Stability Report, the Bank of England (BoE) highlighted rising risks to the UK’s financial system, driven largely by inflated valuations in the AI sector, increased risk-taking in corporate lending, and significant leveraged activity in gilt repo markets. Although British banks remain well-capitalized and domestic household and corporate debt levels are low, the BoE flags global risks—including geopolitical tensions, sovereign debt pressures, and fragmented markets—as serious concerns. Investor enthusiasm for AI has pushed share valuations to unsustainable levels in both the US and UK, raising fears of a market correction that could expose deeper financial vulnerabilities. Specifically, the BoE pointed to growing ties between AI firms and credit markets, which could amplify losses during a downturn. The BoE cited recent bankruptcies in the US auto sector as early indicators of broader stress. Additionally, hedge funds have amassed around £100 billion in leveraged gilt positions, exposing markets to potential instability from unexpected shocks. Despite past reforms strengthening gilt markets after the 2022 bond turmoil, the BoE warns that parts of the non-bank financial sector remain underprepared for future crises. A stress test focusing on private markets’ resilience is expected soon.
- https://www.reuters.com/business/finance/bank-england-finds-some-vulnerabilities-probe-central-counterparties-2024-11-29/ – The Bank of England (BoE) released results from a recent stress test of central counterparties (CCPs), crucial entities in the financial trading system, such as ICE Clear Europe, LCH (a part of LSEG), and LME Clear. The test examined these entities’ credit resilience under a scenario involving significant market stress and the hypothetical failure of two major CCP members. While the overall findings indicated resilience, the BoE identified some vulnerabilities. Notably, certain CCPs were found to hold fewer resources compared to a previous 2022 test conducted amid market turmoil. The BoE highlighted that LME Base, which handles base metal trades, showed potential vulnerability to defaults by members with large, concentrated positions. However, these conclusions were said to be sensitive to modeling assumptions and not specifically designed for the metals market. The BoE emphasized this was not a pass/fail evaluation and committed to further supervision and dialogue with CCPs to address the flagged areas, especially as it continues to shape post-Brexit regulations for these institutions.
- https://www.reuters.com/markets/bank-englands-new-liquidity-backstop-focus-gilts-insurers-initially-2024-03-12/ – The Bank of England (BoE) announced it will introduce a new liquidity backstop aimed at stabilizing financial markets during times of stress, initially focusing on the UK gilt market as well as insurance companies, pension funds, and liability-driven investment (LDI) funds. This move comes in response to recent financial disruptions, such as the COVID-19 liquidity crisis in 2020 and the UK financial market turmoil in 2022 after a surge in gilt yields linked to unfunded tax cut plans. The BoE’s facility will lend cash to non-banks, termed ICPFs, using gilts as collateral and will be activated only in times of market stress, not during normal conditions. The eligibility criteria for participation will be published, and the pricing of the facility will be deliberately unattractive during stable periods to minimize stigma and ensure broad use during crises. The overall goal is to maintain market stability and prevent a repeat of past disruptions.
- https://apnews.com/article/bd4c6049c0f060a6e43ec3aa229c22af – In 2025, all 22 major U.S. banks, including giants like JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley, and Goldman Sachs, passed the Federal Reserve’s annual stress tests. While this indicates that the banks are well-capitalized and able to withstand economic shocks, the tests were notably less severe compared to 2024. This year’s scenario included a 30% drop in commercial real estate prices, a 33% fall in housing prices, a 50% stock market decline, and 10% unemployment—milder than last year’s assumptions. Despite absorbing $550 billion in hypothetical losses, the banks maintained solvency and kept capital levels above regulatory thresholds, which allows them to continue dividend payments and share buybacks. Fed Vice Chair for Supervision Michelle Bowman, recently appointed by President Trump, emphasized the resilience of large banks. The Fed justified the less rigorous testing due to a weakened global economy and past inconsistencies in test results. Notably absent from the test was an assessment of banks’ exposure to private equity and private credit—a growing $2 trillion sector considered by some experts a potential systemic risk. The Fed did conduct a separate exploratory analysis, which found banks generally well-positioned regarding private credit.
- https://www.bankofengland.co.uk/stress-testing/2024/stress-testing-uk-banking-system-scenarios-2024-desk-based – The Bank of England’s 2024 stress test scenarios for the UK banking system include significant global equity price declines, with the FTSE All-Share index falling by 33% in both supply and demand shock scenarios. The US S&P 500 index is projected to decline by 53% in these scenarios. Corporate bond spreads are expected to widen, with UK investment-grade spreads peaking at 450 basis points and high-yield spreads at 2,000 basis points. These scenarios aim to assess the resilience of the UK banking system under severe economic shocks, including substantial declines in asset prices and tightening financial conditions.
Noah Fact Check Pro
The draft above was created using the information available at the time the story first
emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
10
Notes:
The narrative is current, with the Bank of England’s announcement on December 4, 2025, regarding the stress test of private equity and private credit markets. ([reuters.com](https://www.reuters.com/sustainability/boards-policy-regulation/bank-england-launches-stress-test-private-equity-private-credit-industries-2025-12-04/?utm_source=openai))
Quotes check
Score:
10
Notes:
Direct quotes from Deputy Governor Sarah Breeden and other officials are unique to this report, with no earlier matches found. ([reuters.com](https://www.reuters.com/sustainability/boards-policy-regulation/bank-england-launches-stress-test-private-equity-private-credit-industries-2025-12-04/?utm_source=openai))
Source reliability
Score:
10
Notes:
The narrative originates from the Scottish Financial News, a reputable UK financial news outlet, enhancing its credibility.
Plausability check
Score:
10
Notes:
The claims align with recent Bank of England activities, including the December 2025 Financial Stability Report highlighting risks in private equity and credit markets. ([reuters.com](https://www.reuters.com/sustainability/boards-policy-regulation/bank-england-sees-risks-ai-private-credit-gilt-repo-half-yearly-update-2025-12-02/?utm_source=openai))
Overall assessment
Verdict (FAIL, OPEN, PASS): PASS
Confidence (LOW, MEDIUM, HIGH): HIGH
Summary:
The narrative is fresh, with unique quotes and a reliable source. Claims are plausible and consistent with recent Bank of England reports, indicating a high level of confidence in its accuracy.