The Bank of England is looking to include private credit and equity firms in its annual stress test exercise from next year.
In theory, this is not a bad idea. In fact, given recent rhetoric, it sounds like a great one.
The top dogs in the financial world — CEOs, central bankers, the IMF, GlobalCapital — have spent the last few months ringing alarm bells about the systemic threat of the scantly regulated private market.
And, frankly, private credit and equity's reach is vast. According to the Bank of England, over two million people in the UK are employed by PE-sponsored firms, roughly 10% of the private sector workforce. A failure here could easily send shockwaves not just around the market but through the whole economy.
So, if cracks are found while stress testing private credit and equity, then the Bank needs to make sure they are filled in as quickly as possible.
Of course, the Bank has shown it is more than willing to follow up a stress test with regulatory tweaks.
Just this week, it lowered regulatory capital requirements for UK banks — the first cut to the metric in over a decade. Unsurprisingly, the move was warmly received by the market.
But any attempt to impose similar regulations on private sponsors and creditors will likely not be met with an equally enthusiastic response.
When it comes to private credit and equity, the Bank of England will likely put guardrails up as opposed to bring them down.
Private debt and the wider non-bank financial institutions (NBFI) market is, for now, a regulatory desert. Its participants may not like it, but it will be better that the Bank reins it in while it's problems are theoretical rather than trying to fix the roof while the downpour is flooding in through the cracks.