A powerful House of Lords committee has issued a stark warning that the Treasury is adopting a dangerously passive approach towards the potential threats posed to the UK economy by the explosive growth of the private credit market.
A 'Hands-Off' Approach to Shadow Banking
In a fresh report titled Private Markets: Unknown Unknowns, the Financial Services Regulation Committee accused ministers of effectively "handing out the donkey work" of supervising the sector to regulators. The cross-party group of 13 peers expressed deep concern over the lack of detailed engagement from HM Treasury during their inquiry.
"When pressed on what the government… is currently doing to mitigate any risks emerging from the private market sector, we found the department’s responses to be limited to highlighting the action taken by the regulators," the committee wrote. They concluded that the Treasury's answers "lacked detail and demonstrated limited engagement" with the critical issues raised.
The Systemic Threat of an Opaque Market
Also known as non-bank or shadow banking, the private credit industry has ballooned in size since the 2008 financial crisis. As traditional banks faced stricter rules, these private funds stepped in to offer loans to companies that banks were reluctant or unable to finance. However, this rapid expansion, coupled with the sector's inherent lack of transparency, has alarmed financial watchdogs.
The Lords' report sought to determine if this burgeoning industry could threaten the wider UK financial system, especially during an economic downturn. A significant hurdle, however, was a severe lack of data. "We don’t know how concerned we should be because we don’t have the information," committee member Lord Hollick told City AM.
Urgent Calls for Action and Transparency
Due to this data paucity, the committee has urged the Bank of England to complete its inaugural stress test of the private credit market "as a matter of urgency." The Bank's exercise, which is exploring the interconnectedness of major private credit players with traditional lenders, is not due to report final findings until the start of 2027. The peers have demanded regular updates on the process before then.
Reacting to the report, Michael Moore, chief executive of the British Private Equity and Venture Capital Association, welcomed its "proportionate, evidence-based approach." A Treasury spokesman responded by stating: "We have worked together with the regulators to significantly increase our focus of non-banks sectors in recent years and have a robust, flexible framework to protect financial stability." The department added it is considering the committee's recommendations and will respond in due course.
