BoE regulator plans to “dial up the focus” on private credit risks
A Bank of England regulator has said he will look to “dial up the focus on risks from private equity and private credit markets”, as he warned of risks to financial stability from the non-bank financial sector.
Nathanael Benjamin, who has been appointed to the central bank’s Financial Policy Committee (FPC), said in response to the Bank’s questionnaire that he had concerns about rising default rates in private credit and how it could affect credit risk valuations.
“It showed that leveraged loan, private credit and high yield bond default rates remain below global financial crisis peaks. However, it noted that default rates may increase in the current environment, and this could affect credit risk valuations, resulting in leveraged companies struggling to refinance especially if investor risk appetite declines.
“My experience as a micro-prudential regulator gives me greater concerns here, and this is an area I would like us to have even more focus on, particularly given the changing interest rates environment.”
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Benjamin warned of risks in both the banking and non-banking sectors, highlighting that both borrower and lender resilience can be adversely affected by higher debt-servicing costs as interest rates rise.
However, he said that the UK banking system is “well capitalised with high levels of liquidity”, while the non-bank sector has “a number of vulnerabilities which leave it more exposed to higher interest rates, especially if there is a deterioration in the economic outlook and a repricing of credit risk”.
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The private credit market has boomed in recent years, as banks retrench from lending and investors search for yield.
In its latest financial stability report, the Bank of England noted that while there are few signs of stress in the private credit market to date, economic instability “could cause sharp revaluations of credit risk.”