A Bank of England (BOE) report warned of private equity risk management deficiencies as interest rates remain stagnant, with international coordination important.
The BOE’s biannual Financial Stability Report, issued Thursday, said risk management practices in private equity “need to improve,” including among lenders to banks. The BOE’s Financial Policy Committee will consider regulatory work from the U.K. Financial Conduct Authority and Prudential Regulatory Authority to address these issues, with international coordination important, the bank noted.
The report found that U.K.-based private equity-backed corporates are susceptible to international shocks due to a large portion of funding coming from U.S. markets.
Additionally, the report warned of stress in global commercial property markets spilling over to the U.K., similar to what occurred at Silicon Valley Bank last year when high interest rates coupled with extensive venture capital debt caused bank runs worldwide, eventually leading to the demise of Credit Suisse.
The BOE plans to conduct “desk-based” stress tests of Britain’s major banks, using its own models over data from lenders.
In the U.S., stress tests of 31 banks found large banks would endure greater losses than last year’s test, but are capable of weathering a severe recession and stay above minimum capital requirements, the Federal Reserve Board said Wednesday in a press release.
“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.
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