Bank of England and PRA Concerns on Private Equity Financing and Banking Sector Exposure: Key Points and Next Steps

The Bank of England’s Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA) have raised concerns about the private equity industry and its impact on the banking sector. In a series of speeches and publications, the regulators highlighted the growth of the private equity industry over the last decade, with assets under management reaching $8 trillion fueled by low interest rates.

The shift in private equity financing towards more complex structures and the emergence of private credit funds have increased the banking sector’s exposure to the industry. The PRA conducted a thematic review to assess banks’ risk management processes related to private equity financing and found that many banks were unable to identify and measure their exposures accurately.

The PRA expects banks to improve their risk management processes, including identifying exposure to the private equity sector, reviewing linked credit exposures, conducting stress testing, and reporting to their boards. Chief risk officers at banks are required to review the findings and report back to their board risk committees by August 30, 2024.

The scrutiny of the private equity industry by UK regulators reflects a broader trend of increased oversight in the financial services sector. The results of the FCA’s review on the valuation of assets in private markets are expected later this year, while the EU’s AIFMD II will introduce new rules specifically for private credit firms.

Overall, the concerns raised by the FPC and PRA highlight the need for banks to enhance their risk management processes and address the growing complexity and interconnectedness of their exposures to the private equity industry.