The Bank of England has launched an exercise to examine how private market finance might behave under severe pressure, giving the financial system a rare chance to imagine a disaster before it has happened. A spreadsheet has been assigned the task of picturing the storm, provided nobody asks it to use a frightening colour.
The exercise will look at private equity, private credit and the wider ecosystem that helps finance UK companies. It will explore how banks, asset managers and institutional investors might respond to a severe but plausible global downturn, and whether their combined reactions could amplify stress.
This is prudent. It is also the financial equivalent of discovering that an enormous building has no fire drill, then commissioning a two round consultation on what a flame might look like from a system wide perspective.
The Bank says the exercise is not a test of individual firms. It is intended to understand the system as a whole, including how risks might move between private markets, banks and related public markets. Nobody is being singled out. Everyone is being examined collectively, which should allow the panic to be shared more efficiently.
The Office of Financial Meteorology has issued a forecast of cloudy leverage with a chance of valuation difficulty. Its Senior Keeper of the Umbrella Model, Grant Forecast, has prepared the official reassurance: “A scenario test is not a prediction. It is a responsible way to consider what could happen if conditions worsen, without allowing the word ‘worsen’ to appear in a headline.”
The exercise will involve two rounds so participants can see how other firms behave and adjust their own responses. This should reveal whether one institution’s sensible action becomes another institution’s alarming development, before the entire ecosystem discovers that everyone has been calmly reacting to everyone else.
Most of the work is due to be completed in 2026, with a final report expected in early 2027. The findings will cover aggregate system wide results rather than individual firms. That gives the financial sector plenty of time to prepare its preferred expression for uncertainty, probably a pie chart with a small umbrella drawn over it.
By the end, the spreadsheet will have considered leverage, liquidity and the possibility of a severe downturn. It will not, however, be asked to imagine what happens when the people holding the spreadsheet say they have everything under control. That remains classified as a cheerful colour.
Source: Bank of England.
