Key facts
- The Bank of England is conducting a stress test on private markets.
- The scenario involves a geopolitical shock causing a deep global recession.
- The UK economy is projected to shrink by 4% in this scenario.
- Interest rates would rise to 7% under the test conditions.
- The exercise focuses on private equity and private credit markets.
The Bank of England is testing the resilience of private markets to a severe global recession scenario, a first-of-its-kind exercise globally. The hypothetical scenario, which the BoE stresses is not a prediction, is triggered by unspecified geopolitical events that disrupt supply chains, leading to a deep downturn. In this scenario, equity markets would fall 35%, inflation would reach 7%, and the British economy would shrink by 4%.
More than 40 firms, including 17 alternative asset managers like Apollo, Ares, Bain Capital, and KKR, are participating in the system-wide exploratory scenario (SWES). While their participation is voluntary as the BoE does not regulate asset managers, the exercise aims to assess how banks and non-bank financial institutions active in private markets would respond to such a shock and how their behavior could amplify stress across the financial system.
Regulators globally are increasing scrutiny of private markets, with the Financial Stability Board noting emerging stress in private credit. The BoE has previously voiced concerns that opacity in these markets could worsen isolated failures. The central bank plans to share results by year-end, with a second stress test scheduled for early next year.