The Bank of England (BoE) has launched its second System-Wide Exploratory Scenario (SWES) exercise, turning its regulatory lens toward the opaque and rapidly expanding private markets ecosystem.
Following its initial SWES exercise, which focused on gilts and corporate bond markets, the central bank is now targeting the “critical data gaps” inherent in private equity (PE) and private credit (PC). The move comes as regulators globally seek to understand whether the sector, now estimated at approximately $16 trillion in assets under management globally, poses a systemic risk to financial stability during severe economic downturns.
Illuminating the “Shadow” Nexus
While the rapid growth of private markets has provided diverse long-term capital for the real economy, the BoE warns that the resilience of this ecosystem has not yet been tested at a systemic level.
In the UK alone, private equity-sponsored businesses now account for up to 15% of total corporate debt and 10% of private sector employment. The primary challenge for regulators, however, has been the lack of transparency regarding how these non-bank financial intermediaries (NBFIs) interact with traditional lenders under stress.The BoE’s Financial Policy Committee (FPC) has previously flagged potential vulnerabilities including high leverage, valuation opacity, and a heavy reliance on credit rating agencies. This new exercise aims to map these complex interconnections, specifically examining how banks and non-banks might react to a “severe but plausible” global downturn.
A Two-Round Data Exercise
From a data and operational perspective, the exercise represents a significant undertaking. Unlike standard solvency stress tests applied to individual firms, the SWES is designed to capture aggregate behaviours and feedback loops.
The exercise will be conducted in two rounds:
Initial Stress Response: Firms will report how they would react to the hypothetical stress scenario.
Systemic Interaction: The BoE will aggregate these responses to identify “amplification effects”, where the defensive actions of one sector (e.g., margin calls or asset fire sales) might compound stress for others. Firms will then be updated on these system-wide dynamics and asked to adjust their responses.
Participants will include a broad swathe of the market, from traditional asset managers and large banks to the institutional investors that fuel private markets.
Timeline and Reporting
The exercise is set to run through 2026, with the Bank collecting and analysing vast datasets on firm behaviour. A final report detailing aggregate system-wide findings – without disclosing individual firm data – is scheduled for publication in early 2027.For data managers and risk officers at participating firms, the coming year will likely involve intensive data aggregation requirements as the regulator seeks to build a high-fidelity picture of one of finance’s least visible sectors.
“The Bank is effectively asking the industry to prove that its underlying systems can track risk, valuation and liquidity across all asset classes in a consistent way,” comments Gus Sekhon, Head of Product at FINBOURNE Technology. “Without that, no amount of portfolio-level integration will stand up to the stress scenario being modelled. Ultimately, if public and private assets are now meant to sit together in blended portfolios, then firms cannot keep relying on fragmented infrastructures that treat them as separate worlds.”
Subscribe to our newsletter
