Today, new concerns have emerged from the United States, centred on the rapid growth of the private credit market. Recent high-profile failures within this sector have exposed potential weaknesses in lending standards and raised alarms about the sector’s opacity. UK lenders cannot afford to treat this as a distant issue as commented on by the Bank of England recently. The domestic financial landscape is deeply interwoven with non-bank financial institutions, both through direct investment and funding relationships. The combination of high leverage in privately funded companies and a lack of transparency creates a blind spot, meaning that distress in this growing sector could swiftly impact the balance sheets of traditional UK banks, echoing the cross-border contagion dynamics of the past.
The recent collapse of three lenders in the United States was not caused by novel financial instruments but by a failure of basic oversight and controls. These events prove that market participants can no longer rely on non-verified stamps of approval or indeed on reps and warranties from book sellers or other interested parties.
In our opinion, a passive approach to risk is no longer an option. UK lenders must take decisive proactive steps to safeguard their institutions. The priority is to gain absolute clarity on all exposures to the private credit market and the non-bank sector. This involves moving beyond traditional due diligence and highlights the need to seek more demanding and verifiable proof across activities. Additional considerations should include the implementation of mapping counterparty risk and funding chains.
There is a lot for lenders who fund third parties to consider. There was a time when ‘funder reviews’ focused on re-underwriting and eligibility checks but, understandably, Chief Risk Officers are now demanding more; specifically independent reassurance. That can only come from those that have relevant experience of deep dive assessments.
We specialise in helping financial institutions navigate complex, emerging threats – just like these. We provide the analytical depth and strategic foresight needed to identify hidden vulnerabilities and help firms build resilient frameworks. Our enhanced reviews not only test loan analysis and metrics but also map a wide range of funded company integrity/risk criteria.
Whether you are a lender, investor, funder, or Chief Risk Officer, we’ve been helping regulated firms grow safely by providing expertise, bandwidth, and objective perspective since 2008. We can assist firms in refining risk models, improving data quality and enhancing analytics. Give us a call to discuss these and other emerging risks.
