Bank of England to stress test private markets against severe economic shock

Key facts

• The Bank of England is conducting a five-year stress test on 46 private market firms.
• The scenario includes 7% interest rates, a 35% drop in the FTSE All-Share index, and a 400 basis-point increase in leveraged loan spreads.
• The test also models AI-driven disruptions, a 4% UK GDP decline, and 7.5% unemployment.
• Participating firms include alternative asset managers like Blackstone, Apollo, Ares, and KKR, as well as traditional asset managers and institutional investors.
• The objective is to understand hidden risks within private markets and their interconnectedness with traditional lenders.

The Bank of England is set to stress test 46 private market participants against a severe economic scenario designed to assess resilience. The scenario, part of the central bank's "System Wide Exploratory Scenario," includes a five-year period featuring 7% interest rates, a 35% collapse in UK share prices, a 400 basis-point increase in leveraged loan spreads, and a range of artificial intelligence disruptions.

The test aims to provide policymakers with a greater understanding of potential hidden risks within private markets, which have become increasingly vital for UK businesses and are deeply intertwined with traditional lenders. The scenario begins with inflation at 7% and a sharp fall in asset costs in the first year. Year two projects a deep global recession with a 4% fall in UK GDP, interest rates peaking at 7%, and AI-related cost disruptions limiting productivity gains.

Firms participating include major alternative asset managers such as Apollo Global Management, Ares Management, Blackstone, and KKR, alongside traditional asset managers like BlackRock and Legal & General Investment Management, as well as institutional investors and banks. Following an initial round of responses, participants will receive aggregated feedback on market-wide reactions to incorporate into revised submissions. The BOE will only share aggregate results, focusing on gaining advance understanding of global private market developments.