A new report published today, ‘Private markets: Unknown
unknowns', by the cross-party House of Lords Financial Services
Regulation Committee concludes that there is insufficient data to
determine whether the growth of private markets poses a risk to
the UK's financial stability.
Global private markets have grown rapidly. The UK's position as a
global financial centre means it is likely to be the first market
to experience the opportunities and risks, particularly those
flowing from US private markets.
Post-Global Financial Crisis regulatory reforms, particularly to
bank capital and liquidity requirements, have contributed to the
growth of private credit, as banks have reduced direct lending to
UK companies relative to non-banks.
The Committee says the Bank of England is right to shine a light
on the growth of private markets and their interconnectedness
with the banking system through the voluntary System Wide
Exploratory Scenario. The Bank must work with HM Treasury, the
Prudential Regulation Authority, and the Financial Conduct
Authority to continue to monitor developments in private markets.
Evidence given to the Committee by HM Treasury demonstrated a
limited grasp of the concerns raised by the Committee's inquiry.
of Drumlean, Chair of the
House of Lords Financial Services Regulation Committee, said:
“There were too many unknown unknowns to determine whether
private markets pose a systemic risk to the UK's financial
stability. Our inquiry sought to shine a light on the
implications of the rapid growth of private credit markets.
“The Bank of England, the Financial Conduct Authority, and the
Prudential Regulation Authority are right to be vigilant and to
monitor the dramatic growth of private markets and the
implications for financial stability.
“Post-Global Financial Crisis reforms have altered the UK's
lending landscape to the disadvantage of SMEs.”
Other key findings and recommendations in the report include:
- Reforms introduced after the Global Financial Crisis -
particularly bank capital and liquidity regulatory requirements -
have, as intended, encouraged the banking system to retreat from
riskier lending, leaving certain segments of the economy,
including SMEs, less well served by banks.
- Banks are increasingly relying on an ‘originate to
distribute' model of lending, in which private credit plays a
significant role.
- The availability of SME finance has been squeezed by a
combination of changes to bank capital and the fact that private
credit has not entered the SME finance market. Addressing
constraints on smaller and specialist banks' ability to lend
could increase the finance available to SMEs, should demand,
which has been subdued for some time, increase.
- The growth in collateralised loan obligations and significant
risk transfers in the UK may pose a potential risk to the UK's
financial stability. The Bank of England and the Prudential
Regulation Authority should pay close attention to the
development of these markets.
- Throughout the inquiry, the Committee asked for data from the
regulators, academics, and industry trade bodies and firms.
However, the Committee was not able to obtain extensive or
detailed data on the growth of private markets in the UK, the
growth of lending provided by private credit, or the scale of
interconnections
between banks and private markets. The Committee is concerned
that this might represent a gap in policy and rule makers'
evidence base.
Notes to Editors
- The Financial Services Regulation Committee was created in
early 2024 following the passing of the Financial Services and
Markets Act 2023 which repealed retained EU law for financial
services and established a new framework for the regulation of
financial services in the United Kingdom.
- The committee is chaired by of Drumlean. Its members
are: ; ; ; ; ; ; ; ; ; ; ; and .
- The Committee's work can be followed on its website.
