Bank of England steps up scrutiny of private equity and bank valuations

LONDON, March 27 (Reuters) - The Bank of England said on Wednesday it was taking a deeper look at risks from the opaque private equity sector, and why valuations of Britain's main banks are "subdued" compared with international peers.

The BoE's Financial Policy Committee said finance for riskier corporates could be particularly vulnerable to a significant deterioration in investor risk sentiment.

"The private equity sector, which is closely related to private credit and leveraged lending, plays an important role in channelling finance to the UK real economy," the BoE's Financial Policy Committee said in a record of its March quarterly meeting.

It was difficult to assess asset valuations and leverage in the sector, thus making it harder to assess risks to wider financial stability, the FPC said.

"The FPC will publish a further assessment of these risks in its June 2024 Financial Stability Report," it added.

Britain's banking system is "well capitalised" and has "strong liquidity", giving it the capacity to keep on lending even if econonomic and financial conditions were to be substantially worse than expected.

In the fourth quarter of last year, the major banks, such as NatWest, Lloyds, HSBC and Barclays had an overall core equity capital buffer of 14.7%, with an aggregate 3-month moving average liquidity coverage ratio of 147%, the BoE said.

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

The FPC said it would maintain the countercyclical capital buffer - a rainy day reserve - for major UK banks at its "neutral" level of 2%.

Overall profitability of major banks is expected to remain robust but indicators of market value of their future profitability, such as average tangible price to book ratios, remain subdued, the FPC said.

The FPC will publish a futher analysis of the ratios in June, echoing wider concerns in Europe at how valuations of banks lag those of U.S. rivals.

The Bank also flagged that financial firms and market infrastructure, such as payments, clearing and settlement system face further scrutiny of their ability to bounce back from cyber attacks, IT glitches and other disruptions with set deadlines.

It will start a cyber stress test to check on resilience in the spring, with the findings published in the first half of 2025.

"The FPC noted, however that resilience of individual firms alone might not be sufficient to ensure system-wide resilience," the committee said.

Currently, core payment systems have to show they can recover from glitches, but the FPC said it would "consider whether to set impact tolerances for additional vital services beyond payments" to plug any gaps in resilience that it finds.

(Reporting by Huw Jones and David Milliken)

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Keywords: BRITAIN BOE/REGULATION