The Bank of England has published the parameters, variable definitions and mechanics for its private markets system-wide exploratory scenario, a five-year hypothetical stress exercise for private credit, private equity-related financing and adjacent credit markets. The exercise is framed as a financial stability scenario rather than a forecast or a firm-level solvency test.
The scenario examines how a severe but plausible global supply shock and recession would affect behaviour across lenders, sponsors, investors and banks. It describes intensifying geopolitical tensions, disruption to trade, supply chains and commodity transport, a sharp rise in energy prices and shortages of key hardware components, leading to high inflation and falling output in advanced economies.
In the first year, the Bank assumes policy rates rise in the UK, US and euro area, financial conditions tighten sharply, risk premia increase and asset prices fall. Broad equity indices including the FTSE All-Share and S&P 500 decline by about 30% to 35%, while sector-specific shocks hit UK corporates, with severe stress for consumer discretionary, industrial, real estate, technology and financial services.
The exercise also includes an AI-related channel in which technology valuations are pressured while hardware shortages and higher energy costs slow AI development and limit near-term productivity gains. Quantitative tightening continues through a £70 billion annual reduction in the Asset Purchase Facility, while existing liquidity facilities remain available to eligible institutions.
High-yield corporate bond spreads in sterling and dollars widen sharply, and primary issuance in high-yield bonds and leveraged loans is assumed to be very limited, creating refinancing pressure for leveraged borrowers. The stress extends to private investment structures through sharp repricing of listed vehicles, increased redemption requests at semi-liquid funds, weaker fundraising and delayed fund launches.
In year two, the Bank models a deeper recession, with UK real GDP reaching a trough 4% below its starting level, unemployment rising and inflation remaining above target for a period. High-yield spreads peak around 1,200 basis points and total sterling high-yield borrowing costs reach about 1,800 basis points, while defaults increase and refinancing risks intensify.
The scenario also includes reduced returns in private real estate and infrastructure, limits on some property fund redemptions, lender concerns over highly leveraged funds and sporadic cases of asset double-pledging. In years three to five, the Bank models a slow and uneven recovery, with refinancing needs remaining high, fundraising and exit activity staying weak, rated alternative asset managers downgraded by two notches by year three, and real GDP still 2% below its pre-shock starting point by the end of the scenario.
The Bank said it has launched the scenario analysis phase and sent participants the stress case, a narrative and a spreadsheet with around 200 quantitative variable paths, with a two-round process designed to capture how participants’ actions may amplify or reduce system-wide stress. The exercise covers private equity funds investing in UK corporates, credit to private equity-sponsored companies including private credit, leveraged loans and high-yield bonds, and private credit funds lending to other corporates. The Bank has said results will be published in aggregate, as UK regulators also examine whether reporting by private credit managers should become more detailed.