BoE's Severe Stress Test Aims to Gauge Resilience of Private Credit

The Bank of England (BoE) is conducting its inaugural private credit stress test, which models a global shock that sends equity markets down 35 per cent and pushes inflation to seven per cent. This scenario, known as the system-wide exploratory scenario (SWES), is considered exceptionally severe by industry figures.

Alternative asset managers will need to assess how their portfolios respond to financial conditions over a five-year period. Industry figures suggest that the macroeconomic elements of the BoE's hypothetical scenario appear more severe than those seen during the global financial crisis (GFC).

The severity of the exercise can be viewed as a testament to the 'robustness' of the market, according to one industry source. However, the key risk it now presents is how the results are communicated by the BoE afterwards.

UK Private Capital chief executive Michael Moore warned that private credit funds are typically less leveraged than banks and that presenting the results in isolation could create a misleading picture of risk. He emphasized the importance of assessing the results in context, alongside comparable analysis of other parts of the financial sector.