The House of Lords Financial Services Regulation Committee has published a report titled "Private markets: Unknown unknowns". The report highlights the rapid global expansion of private markets and raises concerns about the implications of this growth for the UK's financial stability. The Committee's inquiry focused on identifying the drivers of the expansion of private markets and assessing its potential consequences. The report should also be read alongside the accompanying letter (dated 18 December) from the Economic Secretary to the Treasury, which forms HM Treasury's (HMT) evidence to the inquiry.
The Committee found that post‑crisis capital and liquidity reforms have reduced the capacity of banks to engage in direct lending to UK companies, compared to non-banks and other types of lending provision. These reforms have accelerated the growth of private credit, while finance for small-and medium-sized enterprises (SMEs) has been constrained by changes to bank capital and the absence of participation of private credit in the SME finance market. Although there is clear evidence that private markets have grown significantly, the Committee concludes there is insufficient data to determine whether private credit poses systemic risk, resulting in considerable "unknown unknowns". While the Bank of England is due to undertake its systemwide exploratory scenario exercise, the Committee calls for the government and UK regulators to continue proactively monitoring developments in private markets. It expresses particular concern that HMT's evidence demonstrated a limited understanding of the issues raised during the inquiry, suggesting an overly passive approach to potential risks to financial stability arising from the growth of private markets.
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