Regulator says sector needs a consolidated view to avoid a repeat of Archegos fiasco
Some banks are unable to quantify their exposure to private equity, the Bank of England has found, in the latest warning that the $8tn industry could threaten the wider financial system. BoE regulator Rebecca Jackson said on Tuesday that lenders should routinely stress test their exposure, but “hardly any banks do it well”.
While exposure to private equity has so far largely been a boon to bank balance sheets, higher interest rates and a worsening macroeconomic environment could pose new risks. “The prospective correlations are everywhere, and it’s not difficult to imagine a scenario, such as malpractice at a financial sponsor or the bankruptcy of multiple portfolio companies, where risk correlations increase significantly, and liquidity evaporates, leaving banks open to severe, unexpected losses,” said Jackson.
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