Bank of England tests resilience of private markets to severe global shock

LONDON, June 19 (Reuters) - The Bank of England on Friday set out the scenario for this year’s stress test of private markets, modelling a severe global shock that sends equity markets down 35% and pushes inflation to 7%.

The test assumes unspecified geopolitical events disrupt supply chains, triggering a deep downturn in which Britain’s economy shrinks by 4% and unemployment rises.

More than 40 firms are taking part in the system-wide exploratory scenario (SWES), the first of its kind globally, including 17 alternative asset managers such as Apollo Global Management, Ares , Bain Capital and KKR. As the BoE does not regulate asset managers, their participation is voluntary.

The exercise is designed to assess how banks and non-bank financial institutions active in private markets would respond to a severe but plausible global recession, and how their behaviour could interact to amplify stress across the financial system. 

Regulators globally have stepped up scrutiny of private markets. The Financial Stability Board in May said signs of underlying stress are emerging across private credit - typically non-bank lending to mid-sized companies. The BoE has previously expressed concern that opacity in private markets could exacerbate isolated failures.  

The BoE said the scenario - like others in previous stress tests - is not a prediction of what it thinks is likely to happen to the world economy. It plans to share results from the first round of the test by year-end, before running a second stress early next year followed by a final report. 

(Reporting by David Milliken and Phoebe Seers; editing by William James, Kirsten Donovan)