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A recent report from the Bank of England (BOE) has highlighted deficiencies in private equity risk management as interest rates remain stagnant, emphasizing the importance of international coordination. The BOE’s biannual Financial Stability Report, released on Thursday, stated that risk management practices in private equity “need to improve,” particularly among lenders to banks. The BOE’s Financial Policy Committee plans to consider regulatory work from the U.K. Financial Conduct Authority and Prudential Regulatory Authority to address these issues, with international coordination deemed crucial.
The report noted that U.K.-based private equity-backed corporates are vulnerable to international shocks due to a significant portion of their funding originating from U.S. markets. Additionally, the BOE warned of potential stress in global commercial property markets affecting the U.K., drawing parallels to the situation at Silicon Valley Bank last year, where high interest rates and extensive venture capital debt led to bank runs worldwide, culminating in the collapse of Credit Suisse.
To mitigate such risks, the BOE plans to conduct “desk-based” stress tests of Britain’s major banks, utilizing its own models alongside data from lenders. In the U.S., recent stress tests of 31 banks revealed that while large banks would experience greater losses than last year’s test, they remain capable of enduring a severe recession and maintaining capital above the minimum requirements, according to a Federal Reserve Board press release on Wednesday.
“The goal of our test is to help to ensure that banks have enough capital to absorb losses in a highly stressful scenario. This test shows that they do,” said Michael Barr, vice chair for supervision at the Fed, in the release.
By fLEXI tEAM