The central bank said the system-wide exploratory scenario will produce a final report in early 2027 and will focus on the impact on the British economy as a whole

International News via Reuters:

The Bank of England said on Thursday that it was launching a stress test of how the $16 trillion global private equity and private credit industries would deal with a major financial shock.

The central bank said the system-wide exploratory scenario will produce a final report in early 2027 and will focus on the impact on the British economy as a whole, rather than publish details on the vulnerabilities of individual firms.

“A range of alternative asset managers that are active in private markets, including major global players, have agreed to participate in this exercise,” BoE Deputy Governor Sarah Breeden said.

Private equity firms and other related lenders are an important source of finance for large British businesses.

Unlike the BoE’s regular stress tests of Britain’s banking system, the central bank cannot compel the participation of all financial firms as it does not directly regulate investment funds or private equity companies, especially those based overseas.

FOCUS ON INVESTMENT IN LARGE UK BUSINESSES

The BoE said it had secured participation from firms that make up around a third of Britain’s private-equity leveraged buyout activity, half of private credit in the UK corporate sector and 40% of employment in private equity-funded businesses.

The details of the test have not been decided, but it will be carried out in two stages to allow financial firms to tell the BoE how they would respond to other companies’ actions in a crisis.

The test will focus on investment in large British businesses and how the investors finance themselves. It will not focus on venture capital for smaller firms or commercial real estate.

Some of the alternative asset managers taking part include Apollo Global Management, Bain Capital, Blackstone, Carlyle, CVC Credit Partners, Goldman Sachs Asset Management, KKR and Permira.

On Tuesday, the BoE said in its half-yearly Financial Stability Report that although private markets had proven resilient so far, they had grown in size and had not been tested for their resilience to a big economic shock.

BoE Governor Andrew Bailey said in October that the collapse of two big U.S. companies, car parts maker First Brands and auto dealership and lender Tricolor, might be a warning of bigger problems to come.

On Tuesday, the BoE said these collapses showed how “high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies” could bite both banks and credit markets.

As Financial Stability Board Chair, Bailey has also stressed that this is a key area of focus for the Group of 20 leading economies’ financial risk watchdog.

“This will be an important part of the FSB’s surveillance work in the year ahead,” he said in a November letter to G20 leaders. 

The BoE has promised to share the findings of its private market stress test with international policymakers. 

Reporting by David Milliken and Phoebe Seers; Editing by William James and Emelia Sithole-Matarise

The pound was last down less than 0.1% at $1.3348 after earlier touching its highest level in over five weeks at $1.33585

International News via Reuters:

The pound steadied against the dollar on Thursday after rising over 1% the day before, its biggest daily jump since April, as an upward revision of business activity data painted a brighter picture of the economy. 

The pound was last down less than 0.1% at $1.3348 after earlier touching its highest level in over five weeks at $1.33585.

November’s S&P Global UK Composite Purchasing Managers’ Index, which incorporates both services and manufacturing activity, was revised upwards on Wednesday, supporting the pound.

“The growth outlook doesn’t look as muted as it was initially assumed,” said Kirstine Kundby-Nielsen, analyst at Danske Bank. 

BUDGET WORRIES RECEDE

The pound has jumped in the last week after British finance minister Rachel Reeves’s long-awaited budget passed the bond market’s test without too much fuss. 

Investors had been concerned that Reeves’s announcements, which included tax rises and large-scale spending, could have spooked bond investors, pushing yields higher.   

But British borrowing costs have fallen since last week’s announcement. 

“The Labour government didn’t really stir markets that significantly,” said Danske Bank’s Kundby-Nielsen. 

“What we’ve been seeing over the past week is some of that budget risk being priced out.”

Analysts also said the budget measures were unlikely to cause a rise in inflation, allowing the Bank of England to lower interest rates in the near term. 

Markets are pricing in a 90% chance of a rate cut when the central bank meets later this month. 

Against the euro, the pound was little changed at 87.44 pence. 

Reporting by Samuel IndykEditing by Bernadette Baum