Key Takeaways
- • Andrew Bailey, Bank of England governor speaking as chair of the Financial Stability Board (FSB), warned at the IOSCO Conference that private credit could pose a financial stability risk through "interconnectedness," becoming "one domino in a chain reaction."
- • Bailey said the FSB has identified uncertainty around private credit valuations, leverage, liquidity, underperforming loans, lending terms, borrower concentration, and links among private credit funds, banks, insurers and other investors.
- • Bailey argued that the "absence of visible stress should not be mistaken for the absence of risk," as incomplete information and infrequently priced assets make private credit's resilience "difficult to assess."
- • The warning comes as the BoE's system-wide exploratory scenario (SWES) stress test of private credit is pending, with interim findings expected this year and a final report in the first half of 2027.
- • Apollo Global Management, Ares Management, Blackstone and KKR are among the large private markets firms participating in the SWES probe.
Summary
Bank of England Governor Andrew Bailey, speaking in his capacity as chair of the Financial Stability Board, said private credit may pose a financial stability risk if its growing interconnectedness means it becomes "one domino in a chain reaction." In a keynote speech at the IOSCO Conference, Bailey said a systemic risk "that is opaque, interconnected and poorly understood can become destabilising very quickly," according to the report.
Bailey said the FSB has already identified uncertainty around valuations, leverage, liquidity, underperforming loans, lending terms, borrower concentration, and links among private credit funds, banks, insurers and other investors. He acknowledged that private credit may not necessarily "harm" the system, but said incomplete information and assets that are not continually priced or traded make its resilience "difficult to assess." He added that "the absence of visible stress should not be mistaken for the absence of risk."
Bailey argued that private credit could become a financial stability risk "sooner than conventional size measures suggest," pointing to information gaps and growing interconnections. Posing the question of "how large, or how connected, must private credit become before it poses a financial stability risk," he said shared exposures among banks, insurers and funds could amplify a shock. "We should not wait for a risk to become large before examining its potential to generate contagion," he said.
His remarks come as the industry awaits outcomes of the BoE's private credit stress test, the system-wide exploratory scenario (SWES). The central bank is expected to publish interim findings this year and a final report in the first half of 2027. Apollo Global Management, Ares Management, Blackstone and KKR are among the largest private markets players taking part in the probe into the resilience of private markets.
Bailey said the FSB has already identified uncertainty around valuations, leverage, liquidity, underperforming loans, lending terms, borrower concentration, and links among private credit funds, banks, insurers and other investors. He acknowledged that private credit may not necessarily "harm" the system, but said incomplete information and assets that are not continually priced or traded make its resilience "difficult to assess." He added that "the absence of visible stress should not be mistaken for the absence of risk."
Bailey argued that private credit could become a financial stability risk "sooner than conventional size measures suggest," pointing to information gaps and growing interconnections. Posing the question of "how large, or how connected, must private credit become before it poses a financial stability risk," he said shared exposures among banks, insurers and funds could amplify a shock. "We should not wait for a risk to become large before examining its potential to generate contagion," he said.
His remarks come as the industry awaits outcomes of the BoE's private credit stress test, the system-wide exploratory scenario (SWES). The central bank is expected to publish interim findings this year and a final report in the first half of 2027. Apollo Global Management, Ares Management, Blackstone and KKR are among the largest private markets players taking part in the probe into the resilience of private markets.
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