Bank of England rebuffs calls to speed up ‘shadow banking’ stress test

The Bank of England has rejected calls to speed up its inaugural stress test of the private credit industry, despite growing fears that a downturn in so-called shadow banking may pose a systemic threat to the global financial system.

In a letter to the House of Lords’ Financial Services and Regulation Committee seen by City AM, governor Andrew Bailey reaffirmed the Bank’s original plans for its first ever System-wide Exploratory Scenario, but rejected calls from the influential group of peers to accelerate the process.

In January, the FSRC published a report examining the threat that private markets represent to the UK’s financial ecosystem, in which it warned there was insufficient data on the industry to establish the risks associated with it.

Authors welcomed the launch of the Bank’s first stress test of the industry, which will mimic its biannual probe of the traditional banking sector by putting the private credit sector’s largest players through a range of hypothetical scenarios.

But the peers concluded with a call on central bank officials to accelerate the process – currently not due to report until 2027 – and increase the cadence at which it reports on its progress.

Bank of England stress test a ‘matter of urgency’

“We encourage the Bank to complete this exercise as a matter of urgency and to determine whether private credit and private equity in the UK are systemic,” the peers wrote in the paper, published in January. “We also encourage the Bank to publish timely updates as appropriate; and to share such updates with the committee.”

But in his letter responding to the paper, Bailey recommitted the Bank to the timeline announced at its December, telling the committee he wanted to be “mindful of the constraints of participating firms”.

“We anticipated having largely completed the firm engagement and analysis for the exercise in 2026, with a final report to be published in early 2027,” he wrote.

Unlike the Bank of England’s well-worn temperature check of the traditional lending industry, the more light-touch regulation of private credit means its officials are unable to compel firms to take part. But all of the industry’s most recognised names – including Oaktree, Carlyle and London-listed ICG – have signed up to the probe.

The Bank’s rebuttal comes despite a growing body of evidence showing growing unease around the health of the shadow banking industry, after a string of companies with ties to the industry collapsed at the end of 2025.

High-profile failures

The sector has attracted growing scrutiny in the wake of the trio of high-profile failures, with fears centring around its financial links to the traditional banking sector, as well as its opaque lending practices and the foray several major players have made to attract retail investors.

Since then, several major US direct lenders, including Blackrock, Blackstone and Blue Owl, have been forced to gate their flagship private credit funds from withdrawals, after being hit by a wave of redemption requests. Private credit juggernauts Blue Owl and Blackstone have seen their share price fall some 40 per cent since the start of the year, after both were hit by record-breaking outflows from funds aimed at retail investors.

The valuations of Ares and Apollo – two other major shadow banks – have fallen by 34 per cent and a fifth respectively in 2026.

Concerns over the industry’s resilience have been compounded by the potential disruptive threat posed by artificial intelligence. Public companies whose business models are exposed to the new technology have been the subject of vast sell-offs this year, as investors reevaluate the barriers to entry in industries like software and wealth management. And several major players in the private credit industry have been swept up in the rotation, which some have dubbed the ‘Saas-pocolypse‘, after it emerged several flagship funds had large exposure to software loans.

Morgan Stanley has predicted that default rates across the shadow banking sector will reach as high as eight per cent as a result of artificial intelligence advances. “Credit fundamentals of software loans are challenged with the highest leverage and the lowest coverage ratios across major sectors,” analysts at the investment bank wrote in a note this week.