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The Treasury is being too passive about the risks posed to the economy by the rapid growth of private credit in the UK, according to an influential group of peers who accused ministers of “handing out the donkey work” of overseeing the sector to regulators.
In fresh report examining the systemic risk posed by private markets, members of the Financial Services Regulation Committee said they were “concerned by what seemed like passivity” among Treasury ministers, whose answers lacked detail during the sessions used to inform the study.
“When pressed on what the government… is currently doing to mitigate any risks emerging from the private market sector, we found the department’s responses to be limited to highlighting the action taken by the regulators,” the cross-party group of 13 peers wrote.
“Overall, we were concerned that HM Treasury’s response to our concerns lacked detail and demonstrated limited engagement with the issues raised throughout our inquiry,” they added.
The private credit industry – also known as non- or shadow banking – has come increasingly under the gaze of financial watchdogs, after a period of rapid growth and a string of corporate failures from companies whose debt was linked to the sector.
Much like private equity, private credit firms raise money from investors, from which they form funds that issue loans to borrowers directly over several years. As regulators clamped down on banks’ underwriting and capital requirements in the wake of the 2008 financial crisis, shadow banking funds grew rapidly, issuing higher-yielding loans to companies that traditional banks felt reluctant, or weren’t permitted, to engage with.
But watchdogs fear the sector’s astronomic growth, combined with its naturally opaque lending practices, could pose an systemic risk to the UK financial system during a downturn in lending conditions. This year, the Bank of England is carrying out its inaugural stress test of private credit, exploring the way its largest players interact with both their competitors and traditional lenders.
Not enough private credit data
The House of Lords report, titled Private Markets: Unknown Unknowns, set out to explore whether the burgeoning industry could threaten the wider financial system. But peers concluded they were unable to determine the extent of the threat due to a lack of available data on the scale of private credit lending and the nature of its relationship with banks.
“We don’t know how concerned we should be because we don’t have the information,” committee member Lord Hollick told City AM. “The Bank of England exercise is going to give us a great deal of information on the size of the market [and the] interconnected nature… with banking.”
He added: “We’re not, at this stage, saying that we’re concerned about this or that, because we don’t know about this or that.”
The paucity of available data led Hollick and his colleagues on the committee to urge the Bank of England to complete its stress test “as a matter of urgency”. They also asked officials to publish regular updates on the process which, under the current timeline, will not report its final findings until the start of 2027.
Michael Moore, the chief executive of the British Private Equity and Venture Capital Association, said: “The committee’s report rightly recognises both the growing importance of private credit and the need for a proportionate, evidence-based approach when assessing any potential risks to the wider economy from private markets.”
A Treasury spokesman said: “We have worked together with the regulators to significantly increase our focus of non-banks sectors in recent years and have a robust, flexible framework to protect financial stability.
“We are considering the committee’s recommendations and will respond in due course.”
