The Bank of England strengthens its control over the valuations of banks and private investment funds – 03/27/2024

The Bank of England said on Wednesday it was taking a closer look at the risks of the opaque private equity sector and why the valuations of Britain's top banks are “moderate” compared to their international peers.

The BoE's financial policy committee said funding for riskier companies could be particularly vulnerable to a significant deterioration in investor risk sentiment.

“The private equity sector, which is closely linked to private credit and leveraged lending, plays an important role in channeling finance into the UK's real economy,” the policy committee said BoE Financial Report in a report from its March quarterly meeting.

It is difficult to assess asset valuations and leverage in the sector, making it more difficult to assess risks to broader financial stability, the FPC said.

“The FPC will publish a new assessment of these risks in its June 2024 financial stability report,” he added.

The UK banking system is “well capitalized” and has “strong liquidity”, giving it the ability to continue lending even if economic and financial conditions were to be much worse than expected.

In the fourth quarter of last year, major banks, such as NatWest, Lloyds, HSBC and Barclays, had a core capital buffer of 14.7%, with a liquidity coverage ratio of 147% in three-month moving average, the BoE said.

However, the Bank will undertake a stress test of lenders this year to check their resilience to shocks.

The FPC said it would maintain the counter-cyclical capital buffer – a rainy day buffer – for major UK banks at its “neutral” level of 2%.

The overall profitability of large banks is expected to remain strong, but market value indicators of their future profitability, such as average ratios between the price of tangible assets and their book value, remain subdued, the FPC said.

The FPC will publish further analysis of these ratios in June, echoing wider concerns in Europe about how banks' valuations are lower than those of their US rivals.

The Bank also highlighted that financial firms and market infrastructures, such as payment, clearing and settlement systems, will need greater scrutiny of their ability to bounce back from cyberattacks, outages IT and other disruptions within specified time frames.

It will launch a cyberattack resistance test to check resilience in the spring, the results of which will be published in the first half of 2025.

“The FPC noted, however, that the resilience of individual businesses may not be enough to ensure the resilience of the entire system,” the commission said.

Currently, core payment systems must show they can recover from an incident, but the FPC said it would “consider setting impact tolerances for other vital services beyond payments” in order to fill the gaps it finds in terms of resilience.

(Reporting by Huw Jones and David Milliken)

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