Private credit risks demand urgent global action, Bailey warns
Writing in an article published on Tuesday by industry magazine
The Banker, Bailey said market-based finance had become “very large and
fast-growing” but remained opaque in key areas.
That opacity, he added, obscures complex cross-border linkages and
makes it harder for authorities to see how risks might propagate through the
system when conditions turn.
Bailey’s remarks accompany a new system-wide exercise launched by
the Bank of England in December to examine how shocks could transmit through
private equity and private credit.
Unlike traditional banking stress tests that scrutinise the health
of individual lenders, this exercise is designed to assess broader
macro-financial spillovers.
The focus, Bailey stressed, is on the economy-wide consequences
rather than on the solvency of specific firms, many of which sit outside the
BoE’s direct regulatory perimeter.
“The challenge now lies in managing risks that sit beyond the
banking perimeter as well as identifying and understanding new interconnections
between banks and non-banks,” he wrote.
The message underscores a widening shift among regulators since
the global financial crisis: while banks are better capitalised and more
liquid, the rise of non-bank intermediation has moved substantial credit
creation into less transparent corners of the market.
Bailey also reiterated that policymakers should reject the idea of
a trade-off between stability and growth.
In his view, durable expansion requires confidence in the plumbing
of the financial system, particularly when credit cycles turn and funding
conditions tighten.
The banking sector’s stronger resilience, he said, is “no reason
to rest on our laurels.”
The governor’s warning lands amid a renewed political debate over
prudential requirements.
In Britain, Chancellor Rachel Reeves has previously criticised
heavy-handed regulation as a “boot on the neck” of business.
In parallel, the administration of President Donald Trump has
considered easing capital rules for banks, sharpening questions over how far to
recalibrate standards without reigniting systemic fragilities.
The BoE itself lowered some capital requirements in December for
the first time since the crisis, arguing that other safeguards had been
reinforced and that UK banks now play a smaller role in global markets.
Bailey’s system-wide lens suggests that any loosening for banks
should be balanced by better visibility and loss-absorbing capacity where
credit risk has migrated, notably in private credit funds and their financing
chains.
As the central bank gathers evidence from its non-bank stress
exercise, Bailey’s call sets the stage for a broader push among global
regulators to tighten data, enhance stress-testing frameworks, and close gaps
that could otherwise leave the real economy exposed when the cycle turns.