Systemic financial risk concerns are escalating, and the Bank of England plans to conduct stress tests on the private lending market.

The Bank of England has begun industry consultations on conducting stress tests on the private lending market, highlighting the increasing concerns of regulatory authorities about potential systemic financial stability risks in this area. According to sources, the Bank of England is assessing the feasibility of conducting a "system-wide exploratory scenario" (SWES) for the broader private lending market, similar to the assessment conducted last year for risks in the UK core financial markets. Sources suggest that no final decision has been made yet, but if decided to proceed, the related tests are expected to be launched within the next 12 months. The Bank of England is expected to release more details before Christmas. Bank of England Governor Andrew Bailey stated last week in Washington that central banks around the world need to "shine a light on this opaque world of private finance." On Tuesday, he will attend a hearing with Deputy Governor Sarah Breeden at the House of Lords Financial Services Regulatory Committee in the UK to discuss issues related to the growth of the private market. Earlier, the Bank of England pointed out in a report in July, "Further efforts are needed to close significant data gaps that hinder financial stability regulators from understanding the operating mechanisms of the private market after shocks, and the interactions between internal pressures of the private market and the wider financial system." Private lending refers to companies bypassing the traditional banking system and borrowing directly from less regulated financial institutions (such as private equity firms, asset management firms, etc.). This market has rapidly expanded since the global financial crisis, prompting institutions including the Financial Stability Board (FSB) chaired by Bailey to issue frequent risk warnings. The European Central Bank (ECB) has also expressed similar concerns and conducted investigations into potential risks between the banking system and the private lending sector. Bailey warned last week that the "close connections" between private finance and the banking system could pose risks. He stated, "If you go back to before the financial crisis, we spent a lot of time looking at subprime mortgages and thought they didn't pose systemic risks before the crisis happened but we were wrong." He added, "I'm not saying the same conclusions will apply this time, but it just shows we need to lift the lid and understand deeply." Sources indicated that the success of such stress tests requires close cooperation from market participants - most of whom are not directly regulated by the Bank of England, making early industry consultations crucial for determining the testing themes. The initial "system-wide exploratory scenario" assessment received responses from over 50 institutions, including asset management companies, insurance companies, pension funds, hedge funds, and traditional banks. Unlike traditional stress tests focusing on a single sector (such as banks or insurance), this type of assessment is a global first aimed at evaluating cross-sector risk transmission of the entire financial system in response to shocks.