The Bank of England has launched its inaugural stress test of the rapidly expanding private credit industry to determine how this opaque sector might react to various economic and financial shocks. This initiative, termed the ‘system-wide exploratory scenario exercise (SWES)’, will collaborate with major industry players to simulate a range of market conditions and assess their preparedness for economic downturns.
The test aims to identify whether the collective behaviour of private credit firms, also known as non-banks or shadow banks, poses a systemic risk to the broader economy. It will also evaluate the extent and nature of the industry’s connections with traditional lenders. Private credit funds, akin to private equity firms but focused on issuing long-term debt using investor capital rather than acquiring stakes, have faced increasing scrutiny from regulators following several high-profile collapses.
Since the 2008 financial crisis, the sector has experienced significant growth. However, concerns have arisen regarding its economic reach and the potential for lax underwriting standards. These fears were heightened earlier this year after the collapse of three US-based firms — First Brands, Primalend, and Tricolor Holdings — due to escalating debts, some owed to shadow banks.
The SWES exercise is similar to the Bank of England’s regular evaluations of the banking sector, which aim to ensure that traditional lenders have measures in place to prevent financial contagion. However, unlike the biannual banking sector assessments, private credit is not fully regulated by the Bank, and participation in the exercise is voluntary.
Despite this, most of the industry’s major players are participating. On Wednesday, it was reported that firms such as Goldman Sachs, Carlyle Group, and ICG have signed up for the inaugural exercise, alongside Blackstone, Ares, and Apollo. The Bank stated that a third of the UK’s buyout companies by market capitalisation are involved in the test.
Sarah Breeden, the Bank of England’s deputy governor for financial stability, emphasised the importance of understanding risk flows within the financial system during stress scenarios. She stated, “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.”
Following the global financial crisis, as regulators tightened lending practices, the private credit sector grew from a niche area to one of the fastest-growing and most profitable practices. Over a decade marked by low interest rates, shadow banks lent to companies that traditional lenders could not, achieving higher returns over extended periods. This rapid growth attracted institutional investment and led many non-banks to borrow from traditional banks to leverage their investments. The connections between private credit firms and investment banks, and the potential for an industry-wide collapse to impact other financial areas and the economy, will be a critical focus of the stress test.
The exercise will consist of two rounds, exploring “system-wide interactions and amplification effects,” while also examining “key sensitivities.” It will primarily occur next year, with initial findings released in 2026, and a final report published in 2027.
