A group of peers in the House of Lords has raised concerns about the rapid expansion of private markets to a $16tn (£11.9tn) industry, criticising the Treasury for its “limited grasp” of the risks associated with the boom.
A report by the Financial Services Regulation Committee, published today (9 January), warned that the growth of private markets and its increasing “interconnectedness” with banks and insurers could pose risks to the UK’s financial stability.
Peers said evidence provided by the Treasury during the inquiry suggested “passivity” in the face of potential threats to financial stability arising from the expansion of private markets. “HM Treasury is responsible for ensuring overall financial stability so that the taxpayer does not serve as a backstop to the financial system,” the report said.
The committee focused in particular on the growth of private credit, which has played an increasing role in financing UK companies since the global financial crisis. This has coincided with banks’ reliance on an ‘originate to distribute’ lending model, in which private credit plays a significant role.
The report also noted that the growth of collateralised loan obligations and significant risk transfers in the UK may pose a threat to financial stability. It said the Bank of England and the Prudential Regulation Authority should pay close attention to developments in these markets.
Since 2008, global private markets have grown from less than $4tn in assets under management to around $16tn, with approximately $185bn held in the UK, the report said.
The findings come as the Treasury pushes reforms designed to encourage UK pension funds and insurers to invest more heavily in private markets, through initiatives such as the Mansion House Accord, as part of its efforts to generate economic growth.
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Systemic risk?
However, the report concluded that there is “insufficient” data to determine whether private markets pose a systemic risk to the UK’s financial stability, adding that “meaning there are considerable unknowns”.
The comments follow warnings from high-profile figures, including JPMorgan Chase chief executive Jamie Dimon and Bank of England governor Andrew Bailey, that recent bankruptcies at Tricolor and First Brands could signal deeper stress within private credit. However, many in the sector have refuted these claims suggesting that they are isolated incidents of “corporate fraud” rather than signs of a systemic problem in private credit markets.
Picking up on Bailey’s remarks on systemic risk and the Bank of England’s upcoming stress test of the sector, the committee said the Bank of England is right to scrutinise the growth of private markets and their links to the banking system through its voluntary System Wide Exploratory Scenario.
“Our inquiry sought to shine a light on the implications of the rapid growth of private credit markets,” said Lord Forsyth of Drumlean, chairman of the House of Lords Financial Services Regulation Committee. “The Bank of England, the Financial Conduct Authority, and the Prudential Regulation Authority are right to be vigilant and to monitor the dramatic growth of private markets and the implications for financial stability.”
However, the committee added that it was unable to obtain detailed data on the expansion of private markets in the UK, the scale of lending provided by private credit, or the extent of interconnections between banks and private markets. It warned that this lack of information may represent a significant gap in policymakers’ and regulators’ evidence base.
