The Bank of England (B0E) has warned that private credit remains vulnerable to a tightening in financing conditions, labelling the market as “risky”.

In the record of its September Financial Policy Committee (FPC) meeting, the Bank said “risk-taking in parts of private markets and risky credit markets remained elevated”, following high-profile defaults last year at firms that had borrowed through the broadly syndicated loan and private credit markets.

The FPC meets to identify risks to financial stability and agree policy action to strengthen the resilience of the UK financial system.

The committee said higher interest rates could increase debt-servicing pressures on leveraged borrowers, particularly those using broadly syndicated loans or private credit. Loans in direct lending are predominantly floating-rate, so interest costs adjust as policy rates rise.

The BoE held interest rates at 3.75 per cent in September, while the US Federal Reserve hiked rates by 25 basis points.

While flagging the risks, the committee acknowledged that private credit is an important source of finance for the real economy.

The warning comes as the Bank is carrying out a probe into the resilience of private markets, known as the system-wide exploratory scenario (SWES). The exercise models a global shock that sends equity markets down 35 per cent and pushes inflation to seven per cent – a scenario many in the industry have described as “exceptionally severe”.

The FPC said the SWES would help fill data gaps and improve understanding of how private markets function in a stress scenario, and how that could affect UK financial stability and the provision of finance to the real economy.

The news comes as industry figures have warned that the BoE faces a delicate balancing act when it publishes the findings of its first private credit stress test, as a poorly communicated outcome could dampen growth in the asset class.