UK banks and financial firms active in the booming private credit market are testing their systems against a “severe but plausible” scenario representing a deep global recession, following a directive from the Bank of England.
The move comes amid growing concerns about the market's potential risks to the broader economy.
A group of 46 entities will participate in the exercise, including banks, pension funds, insurance companies and asset managers.
They are tasked with modeling the repercussions of a hypothetical five-year global macroeconomic shock and outlining their strategic responses.
The simulated crisis foresees widespread supply chain disruptions that will lead to a shortage of hardware components for the technology sector, along with a sharp escalation in energy prices.
The resulting deep recession would see UK inflation soar to 7 per cent, interest rates rise to an identical 7 per cent and the unemployment rate peak at 7.5 per cent.
The Bank said that in this scenario, the technology sector is severely affected and the development of artificial intelligence (AI) is affected by higher energy prices and hardware shortages.
Interim results from the first stage of testing will be shared later this year and a final report will be published in 2027.
The Bank said the scenario was purely hypothetical and that it did not foresee such a shock.
But the stress test was designed to help the central bank identify potential risks linked to the private credit market, which has been subject to far less regulation and supervision than the traditional banking system.
This is despite total assets in private equity and credit funds soaring to $11 trillion (£8.3 trillion) over the past decade.
Concerns about the strength of the industry came to the fore in 2025 following the collapses of US auto parts company First Brands and auto dealership and lender Tricolor.
Private credit is a form of lending where companies go not to banks but to a private company and negotiate a deal.
Private equity typically refers to financing in exchange for a stake in a company.
