Key Takeaways
- • The PRA published findings in April 2024 from a thematic review of banks' risk management practices for private equity (PE)-related financing, and expects banks to perform gap analyses with results shared with Board Risk Committees and the PRA by 30 August 2024.
- • Regulators are focusing on bank exposures to PE as the sector's assets grew from $3 trillion to $8 trillion over the past decade, with the BIS proposing updated counterparty credit risk standards targeting non-bank financial intermediaries (NBFIs).
- • The PRA's expectations span four themes: holistic risk management, credit and counterparty risk interlinkages, stress testing, and board-level reporting.
- • Bank exposures to the PE ecosystem now cut across secured loans, credit lines, syndicated leveraged loans, and derivatives, creating silos that complicate a unified view of exposure to sponsors, limited partners, funds, and portfolio companies.
- • Deloitte, which authored the analysis, says it can help banks identify and remediate gaps in PE risk management.
Summary
Regulatory scrutiny of private equity has intensified as the sector's assets grew from $3 trillion to $8 trillion over the past ten years, according to Deloitte's analysis. The Bank for International Settlements recently proposed updated standards for counterparty credit risk management with a strong focus on exposures to non-bank financial intermediaries, while the European Banking Authority commented on EU and EEA banks' interconnectedness with NBFIs.
In April 2024, the Prudential Regulation Authority (PRA) published findings from a thematic review of the adequacy of banks' risk management practices for PE-related financing. The PRA expects banks to compare these findings against their current internal practices through a gap analysis, with findings and remediation plans to be shared with both the Board Risk Committee and the PRA by 30 August 2024. The expectations cover four themes: a holistic approach to risk management, including data aggregation sufficient to monitor exposures at sponsor and fund level; credit and counterparty risk interlinkages, including overlapping exposures, collateral pledges and financial claims; stress testing that captures heightened default and loss correlation scenarios, including derivatives; and board-level reporting that keeps directors informed of aggregate PE exposures.
The widening range of services banks provide to PE clients has broadened exposures across several business lines. A single banking group may hold multiple exposures linked to the same sponsor, limited partner, fund or portfolio company, which makes an overarching view difficult given silos between business lines. Although the PRA review focused on independent credit and counterparty credit risk management, Deloitte notes that PE exposures also carry market and liquidity risk. Examples include credit concentration and step-in risk, wrong-way risk, pipeline risk in syndicated leveraged loans, and the monetisation of illiquid portfolio holdings and margin financing for derivatives at portfolio companies.
Deloitte states it is well placed to support banks in identifying and remediating gaps in PE risk management, citing its technical and regulatory expertise.
No, "summary" ends here.
In April 2024, the Prudential Regulation Authority (PRA) published findings from a thematic review of the adequacy of banks' risk management practices for PE-related financing. The PRA expects banks to compare these findings against their current internal practices through a gap analysis, with findings and remediation plans to be shared with both the Board Risk Committee and the PRA by 30 August 2024. The expectations cover four themes: a holistic approach to risk management, including data aggregation sufficient to monitor exposures at sponsor and fund level; credit and counterparty risk interlinkages, including overlapping exposures, collateral pledges and financial claims; stress testing that captures heightened default and loss correlation scenarios, including derivatives; and board-level reporting that keeps directors informed of aggregate PE exposures.
The widening range of services banks provide to PE clients has broadened exposures across several business lines. A single banking group may hold multiple exposures linked to the same sponsor, limited partner, fund or portfolio company, which makes an overarching view difficult given silos between business lines. Although the PRA review focused on independent credit and counterparty credit risk management, Deloitte notes that PE exposures also carry market and liquidity risk. Examples include credit concentration and step-in risk, wrong-way risk, pipeline risk in syndicated leveraged loans, and the monetisation of illiquid portfolio holdings and margin financing for derivatives at portfolio companies.
Deloitte states it is well placed to support banks in identifying and remediating gaps in PE risk management, citing its technical and regulatory expertise.
No, "summary" ends here.
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